Warning for commodities investors

Investors should reduce their exposure to commodities as any reduction in the demand from emerging markets could lead to a big drop in share market prices, according to the chief investment officer of Wingate Asset Management, Chad Padowitz.

Padowitz warned that nearly all the real demand in commodities was from emerging markets, and even a small change in demand could have a pronounced effect on share prices.

“Any change at the emerging market level will have a pronounced effect on pricing, and I think with tightening monetary policy, China and other oversupplied industries, there is a real risk of [a pricing crash],” Padowitz said.

“Almost all the momentum and pricing in commodities now is based on ...[the supply side being challenged, and the demand side being very robust]. The supply side will remain challenged ... but there are short to medium term risks to demand,” he said.

Padowitz warned that the local governments that are behind the infrastructure boom in China are beginning to refuse to guarantee the investment vehicles needed to finance local construction, which will lead to the collapse in demand.

“The [local governments] are no longer unilaterally standing behind that, and that could be one of those things that show up out of left field, that results in a 20-30 per cent reduction in activity,” he said.

The crash could come anywhere between now and 18 months, but the danger of a crash could take longer to fade, he added.

Wingate has no exposure to commodities outside of oil, Padowitz said.

“We won’t go in when the market is assuming a certain demand profile.”