Black gold
With global recession forecast by the IMF commodities continue to offer value. Firmly anchored by China's unquenchable domestic thirst for oil
A Chinese proverb: To be uncertain is to be uncomfortable, but to be certain is to be ridiculous.
Uncertainty rules the world’s financial markets with some conviction.
After another round of speculative government interventions, oil prices closed at their lowest level for a year on Thursday, dropping below $85 a barrel – further indication that global recession is biting.
Opec has called for an emergency meeting in Vienna on November 18 to consider reducing production to halt further price collapses.
Traders predict prices approaching $80 next week amid growing concern about the reduction in demand. The markets indifferent response to continuing government bank bail-outs suggest the bearish outlook on oil may be sound, although I believe it’s time to buy.
Wall Street was in decline again on Thursday, while the FTSE 100 finished at 4313.8, its lowest level since Friday August 13 2004.
HBOS responded well to the UK’s £500bn government bail out plan, increasing 36.5p to 153.5p, but other indicators suggest that attempts to restore confidence are failing significantly.
A sell note was issued on Barclays and Lloyds TSB by Goldman Sacks, which cut its price target for Barclays from 390p to 250p, for Lloyds from 270p to 170p and RBS from 240 to 140p.
The IMF’s World Economic Outlook published on October 8 described the world economy as ‘entering a major downturn’, the worst since the 1930s.
So why the optimism for oil? Look no further than China where August retail sales rose by more than 20 percent.
The eight month, year-to-date retail sales growth of 21.9 percent — up from 16.8 percent for all of 2007 - represents a 30 percent rise with domestic demand soaring, particularly for electrical goods.
First-half profits for Gome Electrical Appliances Holdings Ltd, one of China’s largest electronics retailer, have almost tripled.
The group has entered 16 cities in 2008 and established 102 new stores.
What’s most impressive is China’s domestic consumption, and therefore its non-reliance on overseas trade.
Urban income climbed 14.4 percent for the first six months of this year, while Rural incomes rose by 19.8 percent over the same period.
Meanwhile seasonally-adjusted Purchasing Managers’ Index reached 51.2 in September, suggesting that manufacturing growth is not being affected by the global slowdown.
Chinese capital investment is growing too, with fixed-asset investment growth reaching 29.2 percent in July, while urban fixed-asset investment for the first half of the year increased 27 percent.
Amid the disorder in the world financial sector, the International Monetary Fund predicted on Wednesday that China's economy would grow at more than 9.0 percent next year while much of the West faces recession. Continued strength over the long term will reignite the demand and the price of oil, which peaked at almost $145-a-barrel in July. Predictions back then that we would see $200 by Christmas were overly bullish, but it will probably arrive before 2010.
For those doubters who think prices will remain tight as long as the Western economies struggle to plug the credit void, there’s a simple, alternative.
It might sound ridiculous, but I’m almost certain. Ditch Chinese proverbs, buy into Chinese companies.
