Rising Commodities Demand Is Changing The Way We Live

The global financial crisis that struck in 2007/08 has left advanced nations with public sector debts at levels which used to be synonymous with emerging markets.

Public debt was measured at 88 per cent of GDP for the European Union in 2011. The US has been put on negative watch as its debt-to-GDP level has exceeded 100 per cent and Japan is now only rated A+ to AA- with debt-to-GDP of almost 240 per cent. Moody’s downgraded the UK in February one notch from Aaa to Aa1.

In emerging markets, by comparison, debt levels have either come down as a result of countries learning from financial crises in the 1990s and running more accountable fiscal programmes or from massive current account surpluses giving them the means to pay down debt.

Either way, one of the major trends for the next 10 years will be the difficulties of advanced nations of dealing with debt, and the resulting slower growth of national income, while emerging markets will move closer and closer to developed market status with low indebtedness.

Inevitably we will see yields on emerging markets high-grade fixed income securities at lower levels than in advanced nations.

DEMOGRAPHICS, COMMODITY SCARCITIES AND WATER

Consensus puts the world’s population at almost seven billion, an increase of over 15 per cent in only 10 years. Almost two- thirds of that increase has occurred in large Asian nations, many of which do not have natural resource banks plentiful enough to meet demand.

Increasing affluence in these nations has put huge demand on natural resources with food and water being two elements that will be of crucial importance over the next 10 years.

Water, in particular, is a crucial natural resource. Humans are believed to need about two litres of water per day in order to function normally.

Food production is a prolific user of water resources. Studies by Professor John Allen of London University produced estimates (termed Virtual Water) that an apple needs 70 litres of water, milk 1,000 litres and a hamburger 2,400 litres.

As income levels increase in emerging markets, consumer spending patterns change along with dietary preferences. More affluent diets tend towards produce that is water intensive to produce.

As the world’s population becomes larger and richer, it is inevitable that measures to allocate and preserve water have the potential to become flashpoints – particularly since water sources traditionally transcend national boundaries making it very difficult to enforce property rights.

CHANGE IN AFRICA & THE MIDDLE EAST

In local markets, increased demand for commodities and modernisation is linking people with wide global networks. Political and social change is highly likely. Events in Tunisia this year and wider a-field point to increased political activity seeking social and parliamentary change.

Education levels are improving steadily and it is clear than women are looking for a more equitable sitting beside their male counterparts in the family and the office.

All point towards greater social dynamism, making for potentially impressive investment returns as entrepreneurialism takes hold and markets become deeper. But as we know, change doesn’t benefit everyone.

There will be losers and winners from upheavals, developments and new discoveries and it is vital that investors are alive to the range of possibilities and have structured investment plans that account for risk as well as return. Countries championing the education and equality of women alongside greater enforcement of contracts and property rights are where positive change is most likely.

Lastly, growth rates in MENA and Africa are beginning to benefit from not just energy-related revenue streams but also international capital flows. MENA’s place within the international investment community will benefit from enhanced standards of corporate, financial and capital markets governance that comes with the move towards developed market status.