Virulent fall of equity markets may have more to do with date of 30 June than temporarily high paper oil prices. Last day of June is associated with end of quarter financial statements. Around the world, financial institutions were preparing for and then creating balance sheets for that important date. Those financial institutions felt compelled by market forces to make their balance sheets look good. That desire translated into a continued reduction in available lending to funds of all kinds. That date is also an opportunity for some investors to withdraw monies from hedge funds with performance problems. In short, a massive overt and covert "marginal call" has been in process, and its ramifications continue. If investors withdraw $100 million from a fund, that fund may, due to leverage, need to sell a multiple of that in equities. A fund leveraged 10:1 would have to sell a billion dollars of equities. That deleveraging has been across the board, and punished even winning sectors with sound fundamentals.
This week's chart is of Agri-Food Stock Index, green triangles, versus the S&P 500, solid black line, and both use left axis. First, Agri-Food Stocks have performed substantially better than equities in general. Second, the ongoing "margin call" has also had a dramatic impact on these stocks, as funds sold all stocks to raise money. Third, fundamentals for Agri-Food have not changed. Will the 2+ billion consumers in China and India continue to eat? Red bars, using right axis, compare current prices of Agri-Food stocks to valuations. When positive, those stocks are selling at a discount to valuations. As is apparent from chart, average discount on Agri-Food stocks has risen to highest level in more than a year. A remarkable opportunity to buy into one of the dominant investment themes of the coming decade may now exist.
With paper oil prices having peaked, now may be time for Agri-Food in your portfolio. Do not be mislead by statements suggesting that falling paper oil prices mean that all commodity related investments are therefore likely peaking also. Commodities is not a homogeneous asset class, and anyone commenting as if it were is under informed. Oil and Agri-Food are separate and distinct components of that asset class. Each is driven by a different set of fundamentals. Around the world, consumers are trying to reduce their use of oil. Around the world, consumers are trying to increase their use of Agri-Foods.
AGRI-FOOD THOUGHTS are from Ned W. Schmidt,CFA,CEBS, publisher of Agri-Food Value View, a monthly exploration of the Agri-Food grand cycle being created by China, India, and Eco-energy. To review a recent issue, write to firstname.lastname@example.org.