Is Jim Rogers wrong on 'investment idea for 2013'? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is Jim Rogers wrong on 'investment idea for 2013'? 

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In this issue:
» What do record outflows from US junk bond funds indicate?
» Will Latvia gain from being a Euro member?
» CPI raises the red flag for RBI
» IMF admits mistakes in Greek bailout
» ...and more!

2013 seems rather difficult for investors. Neither stocks, nor bonds, nor commodities, nor real estate investments are offering much comfort. Hence, one would naturally be keen to pick the brains of global investors for unique opportunities. Thus we are sure that investors would have been all ears to Jim Rogers' recent prediction about the best 'investment idea for 2013'.

Rogers, in his typical contrarian style, suggested that agricultural commodities should find a place in investor portfolios. Both, lower farm output and shift from farming profession will lead to shortage of food grains, he believes. Plus the prices of agri products have hardly caught up with the commodity boom witnessed by metals and fossil fuels. A reversal to the mean could mean that investors make handsome gains over the long term by investing in agri products. Thus he concluded that 'Investment in agri commodities' is the idea for 2013.

As per an article in Economist, the movement in commodity prices over the past 62 years shows that non renewable resources have had a much better run. Demand for fuel, industrial metals and precious metals, particularly from the US and China, have ensured that the prices of these remain firm. Most agri products on the other hand, have seen a downward trend. In fact even the inflation adjusted prices of rice, corn and wheat are lower now than they were in 1950s. One could even find the cause of this in terms of population growth. Although the global population is 2.8 times above its 1950 level, world grain production is 3.6 times higher. So while availability of food grains may not be equitable world over, there is sufficient amount of food grain being produced to feed every mouth.

Now the trend in commodity prices hereon will depend as much on human behavior as it will on levels of industrialization in US and China. For instance, the long-run trend of falling grain prices has created little reason to use grain, land or water more efficiently. Shortage of land or water would mean more efficient use of the resources and focus on improving farm output. This may mean that farm output continues to outstrip population growth thus keeping prices stable. As for fossil fuels, environmental concerns and incentives to limit emissions would lead to demand for alternative energy resources. Solar, wind, biomass energy and shale gas could answer that call.

Thus while there could continue to be temporary periods of boom and bust in commodity prices, it is rather difficult to predict a very long term trend. Investment in agri commodities too therefore could be very speculative and fraught with risks. While we are not experts in recommending commodities for investments, we believe, having a small portion of portfolio in gold would be a good move. Irrespective of the movement in commodity prices, the yellow metal would be a good inflation hedge.

Do you agree with Jim Rogers' views on investment in agri commodities? Please share your comments or post them on our Facebook page / Google+ page

Source: Economist

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01:35  Chart of the day
How does the world read news in the digital age? Well, the answer to this question would be very different in different parts of the world. If the change in newspaper circulation numbers reported by Economist is anything to go by, most Asians, barring Japanese, are keener to read news content in newspapers. Readers in US, Europe, South Africa and Russia though seem to prefer the digital mode. Despite that digital advertising accounts for just 11% of the revenue of American newspapers. On the other hand, China has surpassed India to become the world's largest newspaper market. No wonder most news publishers are looking eastwards.

Source: Economist

When risky assets go down sharply in price, one should certainly sit up and take notice. Financial Times reports that there has been a record US$ 4.63 bn pullout from the US junk bond funds this week. And more could be on the way as selling in bonds usually gives rise to more selling. What possibly could have led to such a step in a market that was until recently, one of the hottest areas on the fixed income side of things? It is the growing uncertainty if few experts are to be believed. The market is lacking clarity and it is lacking consensus and in such an environment, people usually find it safer to move out of risky assets. The bullishness about the US economy has certainly seen its shine come off a bit in recent times. And thus worries are growing that in case the US economy does not recover, the high yield or the junk bond segment is certainly not the place to be. Especially in light of the returns it is offering against the rising risk of defaults. The scenario yet again highlights the importance of staying invested in quality assets at all times. And keeping the extra money in cash if quality is not priced attractively enough.

The Euro zone has been fraught with troubles. It has been criticized for the mess that it has landed itself in. But even during these tough times there are countries that are happy to be a part of it. The latest to join this group is the small nation of Latvia. It has recently been accepted as a part of the bloc and is delighted by the move. The country had been asked to clean up its economy post the crisis of 2008. And it has effectively managed to do so which is why it was accepted into the group. However despite having adhered to all the requirements there is very little for the country to cheer about. The problems that the Euro zone faces with regards to Spain and the rest of its troubled countries are not really going away. During such times the entry of Latvia has made the zone even more risky. Its banking system is not one of the soundest ones with non residents accounting for around half of the deposits. At the same time, the country's unemployment rate stands at 12.8% which is higher than the Euro zone's average of 12.2%.

Latvia has quite a bit to cheer about because despite its troubles it can now enjoy the lower interest rate environment of the Euro zone. But the added risk makes the zone even more unstable. So any sparks could mean that the country could find itself at the brink of danger. Remember what happened to Greece? The situation could very well replicate itself for Latvia.

Because India's growth has slowed to the lowest in a decade, the pressure has obviously mounted on the RBI to cut interest rates. But will the central bank pay heed? For the RBI so far, in the battle between growth and inflation, the latter has played a more important role in its monetary policy. In this regard, the decline in wholesale price inflation comes as a positive. Indeed, in April the annual wholesale price-led inflation slipped below the crucial 5% threshold to 4.89%. But the real problem is consumer price inflation. And this continues to remain high. In April, India's consumer price led inflation stood at 9.39%. And this has largely been on account of food inflation. That is not all. Consumer price inflation has been high for quite some time now. And this has largely been a result of structural issues such as lack of infrastructure in agriculture and inadequate warehousing facilities.

The central bank's policy will also depend on how monsoons pan out. A normal monsoon as forecasted by the Indian Meteorological Department (IMD) will certainly augur well for the Indian economy and will ease some pressure off the RBI. But even if the production of food grains is adequate, the government will have to ensure that there are no supply side bottlenecks. Otherwise a higher food inflation problem will continue to persist, spelling bad news for the economy.

The developed world is going through a series of crises. On one hand, economic growth has been anemic. Unemployment levels have been high and rising. On the other hand, sovereign debts have reached unsustainable levels. What is even more worrying is the fact that policymakers have completely failed to respond meaningfully to the crises. If anything, their steps have only made the crises worse.

The most recent admission of error is by the International Monetary Fund (IMF). As per an article in the Wall Street Journal, the IMF has confessed that it had taken several wrong steps in handling the Greek bailout.

The IMF tweaked its own rules to make Greece's rapidly increasing debt burden look sustainable. Out of four criteria that are required to qualify for aid, Greece had failed on three. Moreover, it also underestimated the effect of its prescribed austerity on the Greek economy. It expected Greece's economy to be impacted by just 5.5% between 2009 and 2012. However, in reality the country lost 17% in real economic output. Even the unemployment levels exceeded the targets by a whopping 1,000 basis points (10%).

This only exposes us to the fact that the debt crisis in Europe is far from over. The bailouts have done nothing but only delayed the eventual crisis. It wouldn't be an exaggeration to say that a far bigger global crisis could be somewhere around on the horizon.

All global stock markets except US stocks ended the week in the red. The European Central Bank lowered its growth forecast for the region. Nevertheless, European markets regained momentum late in the week on the heels of US payroll numbers and market gains. However, all the European stock markets ended the week in the red. The stock markets in UK posted the sharpest losses of 2.6%.

The Indian equity markets closed the week in the red with the shares in the consumer durable space leading the downfall. The Indian stock markets were down by 1.7% during the week. The Chinese market was also down by 3.9% over the week. The Japanese market continued the swoon it began two weeks ago and neared bear market territory, commonly defined as a drop of 20% or more from recent peaks. The Japanese stock market was down by 6.5% during the week as the growth map laid out by the Prime Minister of Japan failed to impress investors.

Data source: Yahoo finance

04:50  Weekend investing mantra
"Although it's easy to forget sometimes, a share is not a lottery ticket. It's a part ownership of a business." - Peter Lynch
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1 Responses to "Is Jim Rogers wrong on 'investment idea for 2013'?"


Jun 9, 2013

Yes. 100%. Money is no food & irrespective of the number of QE - one needs food to survive, even the richest ones.

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