What will be "hot" in 2003?
Commodities could rise, as stocks and the dollar decline
By Mano Sabnani, Business and Financial Consultant
First published in TODAY
25-26 Jan 2003

Just when most investors thought inflation is well and truly defeated and nearly dead and that precious metals and commodities will not see another heyday for a long time to come, they could be proven wrong.

2003 could be the year to turn investor logic on its head again, with a revival in inflation, higher interest rates and a price surge in that long-neglected store of value, gold, as well as survival, food-related physicals like wheat and soybean. Stocks could remain on the defensive in most markets, with the US dollar in decline. Oil prices could stay high.

Is this an alarmist view? Not really, if you consider the scenario now enveloping the world.

Take Japan, once the engine of growth for Asia and boasting the most expensive stock and property markets in the world in 1990. Today, twelve years later, the country is still suffering the effects of the bursting of those two bubbles. Billions have been lost in the deflationary spiral and there are no clear signs of a sustained recovery for the economy and markets.

Northeast and Southeast Asia (ex Japan and China) have been through five years of little or no economic growth and financial market deflation, triggered by the financial crisis of 1997/98. The seeming recovery of 1999 petered out in 2000, when it was the turn of the United States to see its high-technology stock market bubble burst. Asia followed, with only China and India able to withstand the US downturn to varying degrees.

At the present time, Asia (ex-Japan and China) appears ready to look up to a rebound, having partially overcome the over-borrowing-and-over-spending habits which triggered the 1997 crisis. But it needs an engine to get going and neither Japan nor the US is not ready to provide that. For the US, it is still paying the price of ten years of good growth, from the Gulf War in early 2001 to April 2000, when the Nasdaq market peaked. The current US consolidation could have a year or two to go, before it enters a sustainable recovery.

A lot depends on how the US deals with its problems, especially the threat of terrorism and the crises over Iraq and North Korea. We will know in a few months but as it stands now, the soothsayers of the markets are not optimistic.

Technical analysis indicates a continuing equity bear market and a bull market in many commodities. Higher predicted gold, crude oil and food-commodity prices suggest, in reverse logic, a dragged-out conflict in the Middle East and, possibly, the US and its allies failing in their war on international terrorism. In this scenario, the US dollar will be in decline, even as interest rates rise with inflation. Bonds will be in sharp retreat, as will interest rate futures.

The big-picture theme seems to reflect a continuing shift from paper to physical markets in 2003, as "fundamentals" in the corporate world continue to be distrusted. Stocks are seen as offering plenty of tradable moves but there is hot debate about the long-term price direction. There are those who think that the rallies of July and October last year marked long-term bottoms. But hardly anyone predicts a return to the one-way bull market days of the past decade. Most analysts see a wide trading range market between the early 2000 peaks and the 2002 lows for the next couple of years.

On the other hand, some look at the rebounds of more than a 1000 points in the Dow Jones Industrial Average (DJIA) from the 2002 lows as just bear market rallies or pauses in a clear ongoing decline on the charts. These bears are still looking for the capitulation or give-up effect that will take the US market much lower. Equity futures could be hot in such a bear market and hedge funds could do well.

Given the weak US stock market, huge trade deficits and another 50-point cut in the US Fed funds rate last November to the lowest level in more than 40 years, the US does not look its best in attracting capital inflows. So, US dollar weakness could extend into 2003, pushing other currency values higher. Despite Japan's banking and economic problems, the yen could advance against the greenback. Strength is also forecast in the Euro, despite the European Union's problems with the socialist labour and economic policies of its new eastern European members.

With the stock market in a multi-year bear mode and the dollar in decline, commodity prices are set to rise supported by long-term cyclical trends. Some analysts see a financial panic in commodities this year, akin to what was seen in 1973-74, one of the wildest periods in commodity price history partly triggered by a major oil crisis. The fundamental argument for this is that a troubled world will see value in moving out of the "toy" state that features spending on excess items into the "survival" phase which focuses on food commodities like wheat and soybean.

Back home in Singapore and the region, our tiny markets will not escape the major global trends, be it in stocks, commodities or currencies and interest rates. However, as mentioned earlier, Asian markets are actually in the mood to rebound and could decouple from the US trends at certain points in the year.

The Singapore stock market, in particular, could outperform the US as corporate earnings recover, with some second-liners doing exceptionally well. But the negatives that prevail could hold back any stunning rallies in the making. The hollowing out of the market in recent years and the resultant institutional disinterest is a problem, as is the absence of retail participation due to the high brokerage rates for small transactions.