Unless the data are lying, the Asia revival may be for real

Last December, I saw several reasons why the commodity complex looked attractive. The prospect of recurring bouts of currency devaluations is bullish for hard assets. Trade protectionism provides governments with the incentive to stockpile material. From a commodity perspective, fiscal policies involving infrastructure spending more than compensate for the hit to demand associated with declining U.S. consumer spending. China’s imports of refined copper rose nearly 150% YoY in April, as an added example, and soybeans by 55%. In the aggregate, imports of red meat and poultry in the developing world are expected to total 21 million tons this year (DoA estimates), creating a boom for the grains used as feedstock.

From a cyclical standpoint, what I didn’t count on, but may be the most bullish reason of all for the commodity sector, was an early turnaround in Asian economic growth. While there is always room for healthy scepticism, no country has moved to stimulate its economy as much as China has, and it has the means (unlike the U.S.A.). The economic and credit data indeed suggest that China has turned the corner in its mini-recession, and if this is indeed the case, then the outlook for commodities is quite constructive even if we should expect some sort of profit-taking to occur near-term after the breathtaking rally of the last few months, which has seen the likes of copper, oil, gold and the CRB all test or pierce their 200-day moving averages. And the commodity currencies, like the Canadian and Australian dollars, have been taken along for the ride. Again, some giveback may be in order, but the fundamental trend is up in the resource sector.

From a cyclical standpoint, what I didn’t count on was an early turnaround in Asian economic growth

TFirst, emerging Asia already went through its re

over a decade ago. They made the painful economic adjustments and politchanges necessary to embark on a sustainable economic path. We doubt the U.S.A. will ever experience the true pain of such a restructuring as countries like South Korea, Indonesia and Thailand endured in the late 1990s. They have been on secular growth paths the past several years, and cyclical setbacks should be viewed in that context.

maybe, just maybe, it wasn’t. To be sure, after the Lehman collapse in September, the entire global economy imploded. Trade finance dried ucompletely, which wreaked extra havoc on the Asian economies. But we dknow that the U.S. was technically in recession starting in December 2007 and so there was a nine-month period of time up until September 2008 thatwe can use as a microcosm — and during that stretch, we have news for you: China’s real GDP expanded at an 8.9% annual rate; India by 6.1%; Indonesia by 5.2%; the Philippines by 4.7% (and Russia by 3.5%; Brazil by 2.4%). So yes,growth slowed but was still intact and that is the major point. Now that we are past the worst point of the credit cycle and seeing as how the Asian economy has been the first region to show something more than faint pulse, the backdrop for the resource market has certainly improved and will continthat path so long as the Asian economic pickup is not a ‘head fake’ (as an aside, the IMF expects China and India, followed by Brazil, to top the globalGDP growth charts both this year and next).

Emerging Asia already went through its restructuring and depression over a decade ago

Third, we just endured the steepest world economic setback in 70 years and yet commodity prices across a broad front — gold, oil, copper, soybeans — managed to bottom at their highest "recession levels" of all time. Look at oil — it bottomed just above the $30/bbl mark, which in most other cycles in the past represented the peak, not the trough. This attests to the supply discipline by today’s resource companies compared to their predecessors, and affirms our belief that what we experienced last year was a severe cyclical correction in what is still a secular bull market — you can connect the dots on the chart and see that the CRB looks a lot like what the S&P 500 looked like in the months following the sharp 1987 collapse. It seemed like the end of the world in October of that year, and yet in retrospect it was just the 5th year in what proved to be an 18-year secular bull phase. Commodities seem to be in one of those long secular up-waves right now.

This is ultimately very constructive for the Canadian equity market, where 47% of the TSX market cap is in resources, compared to just a 16% share in the S&P 500. It is also a bullish underpinning for the Canadian dollar, even if a pullback is likely over the near-term.