Mehta, who co-manages the JO Hambro Asia ex-Japan Fund, attributed the collapse to “a confluence of a supply side shock and demand stagnation.
“We believe a structural, decade long, bear market in commodities is upon us,” which is good for most of Asia because economies are mainly consumers of commodities.
Good and bad bubbles
Mehta said the commodities bubble, which now seems to have burst, was a “good bubble”. He defines that as a sector implosion that leaves behind productive assets that can be used by society for some time. He used the example of the NASDAQ technology stock bubble — financed by capital markets, not banks — that peaked in the 1990s. It left behind technology that improved the speed and quality of internet connections.
In contrast, he said a “bad bubble” was the run up in Japanese land prices in the late 1980s, which was largely financed by banks. The inflated assets were unproductive by nature and when land prices collapsed in the 1990s, banks were strongly impacted, and that contributed to Japan’s two decades of economic stagnation.
The good bubble today is commodities, he believes. “Every commodity we have to use daily – oil, copper, platinum, etc, and the lower the price gets, the better. The amount of excess capacity in commodities will turn out to be a good quality bubble.”
A bad bubble could be China, which he labels “the new ‘old’ Japan – “addicted to credit, high real interest rates, with no choice but to ease aggressively. Economic risks are squarely on the downside”.
Yet, the commodities bubble will generally prove to be positive for current account balances in Asian countries and detrimental to other emerging markets that are commodities exporters, he said.
Falling commodity prices — boon for Asia, misery for other EMs
