03/06/2008 (The Star Online), Petaling Jaya - Although fund managers are upbeat about the commodities sector, there are concerns that the “investment bubble” is about to burst as commodity prices continue to surge, led by crude oil.

HwangDBS Investment Management Bhd chief investment officer David Ng said the already high crude oil prices had started accelerating and “towards the end of any bubble, the surge in prices becomes the fastest.”

“Our view is that the commodities market will correct eventually, as most of the reasons for the high prices are not long term in nature,” he said, adding that it was impossible to predict when the bull run would end in the commodities sector.

Is the timing right?
OSK-UOB Unit Trust Management Bhd executive director and chief executive officer Ho Seng Yee said although commodities were a good hedging alternative during inflationary periods as currently experienced, the timing was right to relook at the equity market for good opportunities.

“The global as well as the local equity market which was affected by the subprime issue in the US, should now pick up as we expect growth in the global economy over the next six to nine months,” he told StarBiz.

Aberdeen Asset Management Sdn Bhd managing director Gerald Ambrose said Aberdeen group's equity investment process did not use a lot of macro-economic evaluation, particularly when trying to predict the future, because it was often more wrong than right.

“However, it is worth noting that commodity prices fell significantly last week, while the US dollar rallied against all currencies,” he said.

Copper, nickel, zinc, gold and platinum prices were all trading well below recent peaks on Friday. The 30-day Shanghai metals index slipped 5.5% while the 30-day GFMS base metals index fell 12% last week.

Ambrose added that there was also increasing economic evidence that the higher oil price was starting to take its toll on consumption. If Asia started showing signs of a moderating economic growth, it could send commodity prices tumbling, he added.

“But is it time to re-enter equities? It's difficult for me to answer that question; as a long-term investor, Aberdeen has remained 100% invested in its equity funds,” he added.

However, Ambrose said a tentative answer would be yes, provided investors bought into well-run companies with strong balance sheets and an understanding of their responsibility to their minority shareholders.

Going forward
Local private equity fund Kumpulan Sentiasa Cemerlang Sdn Bhd director Choong Khuat Hock was positive on the outlook of soft commodities such as palm oil and expects equities related to plantations to perform well.

OSK-UOB's Ho advised investors to look out for fundamentally strong counters such in the financial and banking sector, which had substantially been affected by the subprime issue and was currently undervalued.

“The strategy is to be as commodity neutral as possible when investing,” said HwangDBS' Ng. “Obviously, almost all companies and economies depend on and or use commodities in one way or another. But it is still possible to create portfolios that are neutral by buying into companies that depend on as few commodities as possible,” he said.

He added that good picks would include stocks in the financial, telecommunication, gaming and property sectors.

“Stocks in oil and gas service providers would also do well even if oil prices were to correct sharply to as low as US$60-US$70 per barrel as the need for such services would still climb brusquely after years of under investment in the sector.

“Companies with strong branding and pricing power would also be attractive as they would have the ability to pass on the price fluctuations (arising from higher raw material costs) to their buyers,” Ng said.

AmInvestment Bank director of retail funds Ng Chze How said equities were still one of the best asset classes for long-term investment despite the uncertainties.

“We see a lot of upside over the next one to two years in the equity markets as policymakers both at the local and global level are doing their best to improve the situation and remove the uncertainties.

Equities related to emerging economies such as China, India, Russia and South Korea are expected to perform better compared with the developed countries,” he added.

Risk diversification
Analysts said investors see commodities as a strategic choice, which also provides a macroeconomic hedge amid fears of a global recession.

“Investors are just trying to protect their investment thus they diversify to mitigate any risks,” an analyst said.

“We've been told that it is unwise to put all our eggs in one basket, so a diversified basket is the best approach,” he said.