Beyond raw materials, Mr. Mobius suggests investors buy shares of well-managed companies with solid dividend payments. He recommends 30 per cent exposure to emerging markets and another 5 per cent to frontier markets, which include economies such as Vietnam and Nigeria.
Mr. Mobius is not a fan of defensive strategies that direct money to government bonds and savings accounts. “If you think your money will be safe in a bank, go and talk to the people in Cyprus,” he says.
A softened market for iron ore
Two barometers of the global economy, iron ore and coal, are set to soften in coming years as they feel the pinch of a teetering commodities cycle, according to B. Muthuraman, vice-chairman of Tata Steel Ltd.
He predicts that bulk commodities will come under the same pressures hitting other metals as new production comes on line.
“There will be a new normal” for iron ore and coal, key ingredients for steel making, says Mr. Muthuraman, whose company has been producing steel for almost as long as it has been mass produced. He forecasts that the new, higher-cost projects launched to feed the commodities boom years ago will depress prices as their production hits the market, but healthier steel demand in China and India will mitigate by how much.
“So, while the long-term prices of iron ore and coal are not going to be the peak prices of 2005 or 2006, they will definitely be higher than what existed for 100 years between 1900 and 2000,” Mr. Muthuraman said during a visit to Canada this week, where Tata is building the $800-million DSO (Direct Shipping Ore) project with New Millennium Iron.
Prices for metallurgical coals and iron ore, one of the world’s most traded commodities by value, have bounced around but largely been driven higher on demand from China, India and other emerging economies after what amounted to a 30-year lull following the Second World War.
Mr. Muthuraman suggested a new normal for iron ore prices may be $80 (U.S.), $90 or $100 a tonne, compared to $120 now and $150 in 2007. Coking coal prices might settle at $175 or $200 a tonne, compared to $300 six years ago. “What we’ve seen in the last ten years we’re not going to see for the next 10 or 20 years,” he said in an interview.
The Tata/New Millennium joint venture will go into production at the end of this year or early in 2014, shipping three million tonnes of iron ore a year to Tata’s steel mills in Europe and ramping up to six million in three years.
The companies are also conducting a $50-million (Canadian) feasibility study on a potentially massive, $5-billion iron ore development in Quebec and Labrador. Mr. Muthuraman said a potential decision there was likely at least a year away and will depend on the investment climate, including factors like the tax regime in Quebec, which is looking at increasing mining royalties.
“We know the Quebec government is looking at this and it will be important that the regime encourages investment,” he said.
A call on consumers and financials
For Tye Bousada, predicting the path of China’s economy matters less than making sure your portfolio is diversified. But how to find the right mix?
Diversification doesn’t come with the TSX composite, which is laden with mining and oil stocks that are sensitive to China’s growth numbers. Energy and materials make up nearly 40 per cent of Canada’s equity benchmark, a potential hazard to owners of index funds.
“There’s a high correlation between the TSX and emerging markets,”said Mr. Bousada, founding partner of EdgePoint Investment Group Inc. and former manager of the Trimark Fund. “Whatever your view is, it doesn’t really make sense to have [nearly] half of your money – if you own the TSX for example – invested in one idea, and that idea is China.”
EdgePoint’s portolio isn’t reflective of the index. The top holdings in its Canadian fund, for example, include such names as Tim Hortons Inc., Shoppers Drug Mart Corp., property insurer Intact Financial Corp. and Onex ~Corp., the investment company run by Gerry Schwartz. But “that’s not due to a macro call on commodities, it’s just due to appropriate diversification.”
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