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Time to get infra the upturn

What a terrible year it has been and very well encapsulated in one fund, JM Finn global opportunities. It focuses on infrastructure projects like power and shipping, in fact, anything that is vital if the industrial revolution in emerging markets is to continue. Of course, it was always going to be a bumpy ride but I did not expect it would get so volatile so quickly.

In broad terms, in the three months up to the end of November, the JM Finn global opportunities fund lost all the gains it had made since 2002. Here, I will discuss what went wrong and what the prospects are for recovery.

The basic premise behind the fund’s investment strategy is the urbanisation of around five billion people in the developing world.

In other words, the populations of these countries all want what we have – an urban lifestyle with all the trappings of the modern world.

There is, in effect, a huge structural imbalance between the developed world and the developing world.

Call it globalisation, urbanisation or industrial revolution – whatever its name, it created huge demand for natural resources. Oil, metals and cereals all saw huge price prices as a result. However, in the present global recession, those prices have come crashing back.

For example, America’s contracting economy means that it uses around two million fewer barrels of oil per day than it once did.

That trend is being repeated across the globe and, as demand for all manner of commodities falls, the projects that supply them are being mothballed. Development of new refineries, mines, oilfields, etc are being put on hold.

I think this is setting things up for an interesting situation over the next few years. Almost overnight, we have gone from a world that gorged itself on natural resources to one that is practically starving itself.

Unless you believe the end of the world is nigh, then ask yourself this question – when the world economy starts to recover again (perhaps in 2010 or 2011), will there be enough commodities to go around?

My answer is no, which is why I believe there will be another bull market in commodities not too far off. Demand is bound to pick up before supply and prices will be driven higher once again.

The price spike in commodities seen in recent years was, I believe, just a dry run for something much bigger that will occur when the world emerges from this recession.

If this is the case, then funds such as JM Finn global opportunities will have their day once more. It is a portfolio mainly of larger companies that should benefit from a continuation of the industrialisation and urbanisation of emerging economies.

When the news is grim, it is easy for investors to bury their heads in the sand but instead I think this should be seen as a tremendous opportunity.

I cannot tell you when the bottom of the market will be (further losses from here are certainly possible) but I would suggest that now could be a great time to start a long-term regular savings plan. Share prices have effectively gone back in time to 2003, so investors are getting a second bite at the cherry.

The last great oilfield discoveries were in the 1950s, agriculture has been run down significantly over the years and so too has the mining industry. Our need for these commodities has not evaporated and over 10 or 20 years is likely to increase significantly.

I cannot imagine supply increasing at the same rate so the long-term dynamics for commodities remain as attractive as they ever were.

If, like me, your investment in funds exposed to commodities has nosedived this year, please do not panic. If anything, now should be the time to consider adding small, regular amounts back into the market while prices are so low.

Mark Dampier is head of research at Hargreaves Lansdown


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