05/05/2011
By Matt Ritchie
ING Investment Management (ING IM) is remaining overweight on agriculture, while reducing its position on energy from overweight to neutral, the company said in an investment view released today.
Despite the market’s focus on demand fallout from recent natural disasters and geopolitical events, ING IM said factors like higher structural demand, food security and weather point to strong performance from agriculture in the near future.
Senior strategist, Real Estate and Commodities, ING IM Europe, Koen Straetmans said recent unrest in the Middle East and North Africa (MENA) and the aftermath of the earthquake and tsunami in Japan had combined with a “temporary pullback” in prices, leading to renewed purchases of strategic agricultural commodities reserves in countries such as Algeria, Tunisia and Egypt.
“Iraq, meanwhile, has increased its strategic purchases and Saudi Arabia plans to double its wheat stocks within three years. All of these events have led to a revival in prices, but currently these upward forces are being overpowered by the short-term demand concerns experienced in Egypt and Japan.”
Japan, already the world’s largest corn importer, may have an increased need for imports in the wake of the incident at the Fukushima nuclear plant, and Straetmans said the time lag between planting and harvesting and external factors such as weather conditions mean prices are typically volatile in the agriculture market.
“Markets have recently focused on the short-term fallout of agricultural demand, with both Egypt and Japan being important figures in the import market.
“Despite the typically high levels of volatility in this market, ING IM views agriculture as an important sector in the coming months and we maintain our overweight position in this sector.”
Meanwhile, ING IM is warning that volatility in the energy segment has increased substantially recently, driven by escalating violence in Libya and mixed signals on oil supply out of Saudi Arabia.
While the Saudi Oil Minister last month announced that the country had ample spare capacity to meet increased demand or a supply shortfall, a later announcement stated that production would be reduced due to a lack of demand, Straetmans said.
“Our base case scenario remains one of lingering supply concerns out of MENA without an outright large scale supply disruption. Global economic growth may have to be revised down slightly and this will correspond to lower but still good oil demand growth. Chinese restocking, if confirmed in the next several weeks, may cushion the downward revisions. In such a scenario the oil price is likely to be trading in a wide range of $110 US to $135 US for Brent depending on the dominant theme and concerns in the market. With Brent prices currently trading around the mid-point of the range, we feel it’s appropriate to scale back our overweight position in energy back to neutral.”
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