The Word from Hansard, 26th Nov 2009

The Word from Hansard

The economies of the 30 members of the Organisation for Economic Co-operation and Development (OECD) grew by 0.8% in July to September, the group has said. This is the first time that the OECD economies have expanded since the first quarter of 2008. Japan delivered the strongest growth, expanding by 1.2%, while the UK posted the weakest, contracting by 0.4%. The UK was the only G7 country not to grow in the quarter. The eurozone grew 0.4%, while the US expanded by 0.9%.

Comparing GDP with the same quarter a year earlier as opposed to the previous quarter, the UK economy contracted by 5.2%, again more than any other G7 economy for which data was available. The US economy shrank by 2.3% year-on-year, less than any other G7 economy. German business confidence increased more than economists forecast to a 15-month high in November, suggesting the economic recovery may gather pace next year. The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, rose to 93.9 from 92 in October, the highest reading since August last year. Economists expected a gain to 92.5, according to the median of 37 forecasts in a Bloomberg survey. The index reached a 26-year low of 82.2 in March.

European industrial orders advanced for a sixth month in September, led by capital goods such as machines, as the euro-region economy pulled out of its worst slump in more than six decades. Orders to industrial companies in the 16-nation region rose 1.5% from August, when they increased 0.6 percent, the European Union’s statistics office in Luxembourg said today. Economists originally forecast a gain of 1%. In the year overall, new orders dropped 16% after declining 23.2% in August alone.

In a speech on Wednesday at a conference organized by the Monetary Authority of Singapore, International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn called on Asia to play a leading role in guiding the global economy to a new, more sustainable path for global growth. "This is not only appropriate given Asia’s economic weight," he remarked, "but also necessary, since Asia is such an important part of the solution."

The strength of Asia’s economies has helped them weather the global financial crisis, and the region is leading the world into economic recovery, he said. The IMF expects Asia’s GDP growth to be 5.75% next year – almost double the 3% rate forecast for the global economy. "Thanks to strong fundamentals and quick and forceful policy responses to the crisis, Asia has performed considerably better than other regions of the world – and has thus played an important role in supporting global recovery," he said.

Oil declined for the third time in four days on Tuesday as the dollar strengthened against the euro, prompting traders to close trading positions before the long U.S. holiday weekend. The Energy Department report due on Wednesday may show the country’s crude oil stockpiles had risen, possibly reaching a four-week high, bolstering concern fuel demand may have yet to recover.

Spotlight on Agricultural funds

Whilst an agricultural element has been part of many commodity funds for along time, it wasn’t until relatively recently that the first truly agriculture-focussed funds were made available. Based on the simple premise of "supply and demand", agriculture funds have become a popular asset class in their own right, with a handful of funds now available from a number of household-name fund management groups.

Given the diversified nature of the agricultural industry, the range of available funds is far-reaching, providing investors with the opportunity to become engaged with funds that trade in a whole host of asset type ranging from the management of cattle to the provision of biofuel. Agriculture opportunities are accessed through land purchase (for production of foodstuffs or, more recently, biofuels), through equity investments in companies that specialise in this area. Direct land purchase is expensive and of limited availability, therefore most agriculture retail funds are equity-based, thematic propositions that focus on companies along the "farm-to-fork" spectrum.

For example, Barings’ Jonathan Blake, who manages its Global Agriculture fund believes the case for agriculture rests on the three Fs: food, feed and fuel.

The prime drivers for both food and feed can be traced to emerging markets. Mr Blake quotes the United Nations’ global population growth forecast from 6.5bn at present to 9.3bn by 2050, "that’s three new mouths to feed every eight seconds." Significant shifts in the dietary behaviour of people from emerging economies, particularly China and India, to protein and dairy-based diets will transform agricultural demand. For example, to produce 1kg of beef takes 8kg of feed, he says.

Head of Specialist funds at Invesco, Tim Mitchell concurs with this view, citing the longevity of agricultural funds as one of its main draws, "this sector is not about a six-month, one-year or three year view. It’s about taking a long-term view on demographic change and the growing middle class in Asia and India."

Not only can such funds intrinsically benefit from the rapid development of emerging markets, they also stack up during periods of recession and hardship as Mitchell comments "when times get tough, governments are more discerning about what they want to spend money on and growing food will always be a priority. It’s more defensive since agriculture tends to be supported by the government."

US president Barack Obama’s support of biofuels and the finite nature of global oil supplies provide a third element to investable opportunities in agriculture.

The global economic meltdown of the last year and the massive financial deleveraging seen in the wake of the collapse of Lehman Brothers in September 2008 battered down agricultural commodities along with everything else. While we have seen significant divergence as to the recovery, we see a bright future across the space as demand continues to improve and temporary supply increases reverse.

Not immune from external economic factors, agriculture funds were also affected by recent events, as Guy Brook of Castlestone Management, managers of the Hansard Aliquot Agriculture fund explains "the global economic meltdown of the last year and the massive financial deleveraging seen in the wake of the collapse of Lehman Brothers in September 2008 battered down agricultural commodities along with everything else. Demand for biofuel evaporated and consumers cut back on expensive high-protein diets while investors desperate for liquidity crowded the exits to sell at any price. While prices have not climbed back to the heights from which they fell, global economic recovery and individual commodity fundamentals both paint a bright picture. Global stimulus has started to right the economic ship and drive demand for many commodities. Cocoa grindings have reversed their decline, Chinese demand for soybeans is insatiable and higher energy prices are renewing demand for biofuel. The supply side of the equation has really caused divergence in the sector, with supply deficits causing the soft commodity subsector to outperform while perfect growing weather in the U.S. Midwest has held down grain prices. However we view the large production increase in the U.S. to be transitory and think the demographic drivers of agricultural demand will again outpace supply growth in the coming year and years ahead."

Hansard has a variety of fund links across a diverse range of asset classes ranging from commodities to emerging market equities to climate change solutions. To find out more about our fund links please contact your Hansard Account executive who will be able to assist you further.

The information set out herein has been obtained from various public sources and is sent to you by way of information only. Hansard can accept no liability of any sort in relation thereto and readers should obtain their own verification of any statement before making any decision which may have any financial or other impact.

Neither the information nor the opinions herein constitute, or are they to be construed as, an offer or a solicitation of an offer to buy or sell investments.

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