Investors could be entering another boom period for soft commodities, as research shows returns are counter-cyclical to the Australian Securities Exchange (ASX).
Great Southern fund manager David Bryant said research back to 1900 showed three periods when soft commodity prices (including wheat, corn and sugar) outperformed the ASX.
“The good periods of commodity prices co-relate to poor returns on the ASX,” he told a Dealer Group agribusiness conference in Melbourne.
“These periods of strong prices can last up to 20 years.”
According to the research by Bryant, the three periods of commodity price boom were between 1904-1915, 1933-1952 and 1964-1974.
In the first period commodity price growth was 5.3 per cent compared to zero ASX real growth excluding dividends.
The second period saw commodities delivering 4.3 per cent growth compared to stocks with -0.4 per cent growth.
The last decade of commodity rice growth delivered 8.8 per cent during the 11-year boom while stocks delivered -2.7 per cent.
These commodity price booms have to be tempered with the periods in between where stocks were king.
Between 1916-1932, commodities growth was 1.2 per cent compared to ASX returns of 6.7 per cent. In the second period ending in 1963, commodities returned 0.2 per cent and stocks 6 per cent.
The final period of the last century, between 1975-1998, commodity price growth was 0.8 per cent and stocks 6.5 per cent.
According to Bryant, Australia is poised to enjoy another soft commodity price boom. Since 2006 commodity prices have been rising while the share market has been rapidly declining.
Based on the last 10-year commodity cycle, which means this downturn in share prices could finish in 2016, commodities should deliver a 6.1 per cent growth potential.
Shares are presently a nominal -1 per cent for the period, but that is not factoring in the continuing falling prices achieved this year.
He said the one thing that is obvious, based on the last century’s data, is these cycles last a minimum of eight years and as long as 20 years.
“It is obvious that the easy money from shares is gone, so investors might like to consider changing their portfolio to reflect the commodity price returns in the future,” Bryant said.
He admits that what is unknown is the length of this next cycle and the severity of its downturn.
