Now this decades-old practice is being challenged by the new head of the China Securities Regulatory Commission (CSRC), Guo Shuqing, who has publicly questioned whether the regulator should simplify the tedious listing approval process.

And market participants are in favour of the idea that the CSRC shift away from its traditional role as a gatekeeper for new share listings and focus more on supervision.

“It should be a question of when, not if,” said one investment banker. “So far, the securities regulator has paid very little attention to the market and has only given the go-ahead to companies whose development is in line with Beijing’s economic blueprint. The approval process could take so long that the listing timing is out of issuers’ and bookrunners’ control and companies often miss market windows when they do become available,” he said.

As surprising as it may sound, it can take several years before a listing hopeful may actually come to market, if it comes at all. One example of the prolonged application process is Dongguan Bank. It filed a listing application in 2008 and hired Goldman Sachs Gaohua Securities to manage the initial public offering. Since then little has happened and the name of the small city lender in South China had been long forgotten until last week when the bank said it was still waiting in the queue and hoped to go public this year.

Moreover, when listing hopefuls clear the application process, they may still be told to wait and make way for flagship deals. In 2010, in a bid to pave the way for Agriculture Bank of China’s massive dual-listing in Hong Kong and Shanghai, Beijing told other Chinese banks that were desperate to replenish capital to put their deals on hold. As the number of investors that would want to put money into Chinese banks can be limited, it was viewed to be important to be first out of the gate.

“Guo’s remarks tell us he wants the A-share market to be more market-driven and more like its overseas counterparts,” said the investment banker.

Currently, all issuers need to seek a green light from the CSRC’s listing assessment committee, which consists of several members who, observers say, may not fully understand the equity market and the businesses of the applicant companies.

CSRC announced by the end of last year that all companies seeking a listing are required to file a preliminary prospectus one month before a scheduled assessment, which is up from five days previously. This will allow investors and committee members more time to understand and verify the information provided by listing applicants.

While generally viewed as a step in the right direction, Guo’s comments have also sparked worries that a relaxation of the approvals process might lead to speculative issuers flocking to the equity market – adding further to the long queue of listing applicants. Earlier this month, in an effort to improve market transparency, CSRC for the first time released the names of 515 companies that are seeking approval for a new share sale.

Guo, the former chairman of China Construction Bank, is well-known in China for his reform-minded style. He succeeded Shang Fulin to become the chairman of CSRC in November last year.

But as the commodity boom rumbles inexorably on and miners became majors, they have shifted to larger, global exchanges such as London. The recently announced merger between Glencore and Xstrata is the latest move in the maturation of a sector that was once considered extremely high risk.

HKEx is acutely aware of these trends, but its ambitions to become a global venue for mining stocks are clear. It also realises that these stocks can be extremely volatile — and with the Hong Kong government sensitive to retail investors losing money, it has taken a cautious approach to allowing such companies to list.

One such example was IRC, which was spun out of UK-listed but Russian-focused mining company Petropavlosk in September 2010. The stock is up some 40% so far this year, although it is still some 20% off its IPO price.

“The HKEx is extremely good in how it looks after retail investors,” said Peter Hambro, chairman of Petropavlosk, speaking on the sidelines of the Troika Dialog Russia Forum in Moscow last week. “When it took on the listing of mining companies it took a long time.”

Petropavlosk still owns 65.5% of IRC, which is run by Hambro’s son, Jay. Mining companies may be unfamiliar in Asia, but such governance structures are not.

The current trend in listing venues is that they should reflect not only where companies can get the highest valuation, but also where their customers are. Also speaking at the Forum was Ivan Glasenberg, the CEO of Glencore, on the day that the merger with Xstrata was announced. He said that it made sense for the company to have a secondary listing in Hong Kong as China was consuming 50% of the world’s commodities. But on a per capita basis, the Chinese only consume 16% of the world average when it comes to aluminium and 25% of the average consumption of oil. China is already the biggest player in the global commodities market — and it is getting bigger.

Being close to customers clearly makes sense from an operational point of view, but increasingly companies are looking for both customers and shareholders to be close.

“Most of the companies listed in Toronto are operating in that timezone,” said Hambro. “But as we are seeing the Chinese population becoming more financially educated, that means demand for this type of investment [mining stocks] will grow.”

Other global miners such as Vale from Brazil, Kazakhmys from Kazakhstan and South Gobi Resources from Mongolia, have already joined Glencore in taking a secondary listing on HKEx. They join Chinese miners such as Zijin Mining, Zhaojin Mining and Yanzhou Coal, which have primary Hong Kong listings.

Such listings give mining companies the acquisition currency for deals up and down the supply chain. And if Asian investors will buy this stock, the mining companies are only too willing to sell it. “All commodity traders — if they want to buy assets — need to list in order to get permanent capital,” said Glasenberg. “Otherwise they run out of cash when their partners leave. Being public gives you a lot of flexibility and firepower, and I like it.”

Speaking about Petropavlosk’s gold mine in the Amur region of the Russian Far East, on the border with China, Hambro said: “We are financing the mine from China and we are building it with Chinese labour. We have a symbiotic relationship with China.”

It remains to be seen if Chinese investors are willing to have a similarly symbiotic relationship with the miners.

Holiday sales on the mainland grew 16 percent to 470 billion yuan ($75 billion), according to data from the Ministry of Commerce, the slowest pace since the 2009 financial crisis and three percentage points below last year’s increase. China is finding it is not immune to global economic forces and the slowdown is hitting Chinese consumers, who may increase this year’s spending at a slower pace than in 2011.

This may mean trouble for the growing number of foreign companies rushing into China, especially luxury brands, said Jason Yuan, an analyst at UOB Kay Hian in Shanghai.

“This year is going to be tough, probably the toughest year for many foreign luxury brands since they entered into China,” he said.

“Sales of jewelry and valuable watches during Chinese New Year were quite disappointing,” said Caroline Mak, chairman of the Hong Kong Retail Management Association. “Sales growth of over 30 percent last year is unsustainable against a worsening macro-economic backdrop.”

Some member jewelers reported customers buying smaller diamonds than they used to, she said.
Smaller Diamonds

Hong Kong jeweler Chow Sang Sang Holdings International Ltd. (116), whose sales grew as much as 28 percent in the first three days of the holiday, expects quarterly sales growth to slow to 10 percent in the second quarter from 15 percent in the first.

Sales director Dennis Lau declined to make projections for the rest of the year because of worries a further global downturn could hurt consumer sentiment.

“We can’t see how strong the recovery in the U.S. is, and the debt crisis in Europe never seems to end,” Lau said. “If those economies mess things again, it could severely hurt global consumer confidence.”

Twinky Choi, an assistant at a Hong Kong Shiseido Co Ltd. (4911) cosmetics store, is seeing that first-hand.

“People are browsing,” Choi said. “They don’t buy instantly, unlike last year when customers were grabbing everything.”

China’s economic growth, hurt by a property market slump and slower export growth, is poised to weaken to 8.5 percent this year from about 9.2 percent in 2011, according to the median estimate of economists in a Bloomberg survey.
‘Momentum Not Exciting’

“The momentum is not exciting,” noted Macquarie Capital Securities analyst Linda Huang.

The Lunar holiday, like Thanksgiving or Christmas in the U.S., is among the biggest selling periods in China and parts of Asia. Chinese consumers spend more at home and at overseas vacation spots such as Hong Kong and Macau. This year’s holiday extended from Jan. 23 to Jan. 29 and marked the start of the year of the dragon.

“It does give some indications on retail sentiment,” said Phoebe Tse, an analyst at Barclays Capital Asia Ltd. “It is one of the busiest shopping seasons.”

Lipstick and fragrance seller Sa Sa International Holdings Ltd. (178) said Lunar sales were below its forecasts. The retailer’s Hong Kong and Macau sales rose 17 percent during the Lunar holiday from Jan. 23 to Jan. 29, which was “slightly below our expectations,” said Chief Executive Officer Simon Kwok in a statement. “Looking ahead, the group remains cautiously optimistic.”

Mak said her association expects Hong Kong retail sales growth to slow to 15 percent this year from 25 percent in 2011.
China Home Prices

China’s consumers have been hurt by a drop in home prices, which fell for a fifth month in January, according to SouFun Holdings Ltd., the nation’s biggest real-estate website owner. Residential prices slid in 60 of 100 cities tracked by the company in January, according to SouFun. The benchmark Shanghai Stock Exchange Composite Index has also fallen 17 percent over the past year, lowering the value of consumers’ investments.

“Macro-economic uncertainties impact consumer confidence,” Tse said. “They feel more secure when they have money in the pocket.”

Chinese tourists on holiday drove up January casino revenue in the gambling center of Macau 35 percent to 25 billion patacas ($3 billion). Las Vegas Sands Corp. (LVS)’s Sands China Ltd. (1928), Wynn Resorts Ltd. (WYNN)’s Wynn Macau Ltd. (1128) and MGM Resorts International (MGM)’s MGM China Holdings Ltd. (2282) compete in Macau, the world’s largest gambling hub.
Slower Casino Growth

Even so, high-stakes gamblers, who bring in the most revenue and can bet as much as $250,000 a hand, may not have boosted sales as much as previous years because of less available credit, BOC International analyst Edwin Fan said.

Banks have less money to lend because China’s policy makers have raised interest rates and reserve ratio requirements.

Macau casino revenue growth may slow to 22 percent this year from 42 percent a year ago, said Victor Yip, an analyst at UOB Kay Hian Ltd.

At South Korean retailer Shinsegae Co. (004170) sales rose 9 percent between Jan. 6 and Jan. 17, a promotional period just before the new year for tourists. That was slower than last year’s 16 percent, said spokeswoman Lee Jung Ah.

At Korea’s Lotte Shopping Co. (023530) sales growth in a promotional period from Jan. 6 to Jan. 19 was 9.8 percent this year compared with last year’s holiday increase of 16 percent.

Expenditure per customer at Tokyo’s VenusFort mall didn’t rise and wasn’t proportional to the rise in Chinese visitors, probably because of the stronger Japanese yen, said spokesman Yusuke Nishimura. The yen, which has risen because of demand for safer assets amid Europe’s debt crisis, has gained 7.1 percent against the dollar in a year and 2.5 percent against the yuan.
Jewelry Sales

Hong Kong jeweler Luk Fook Holdings International Ltd. (590) said sales at stores open at least a year grew 13 percent in mainland China and 4 percent in Hong Kong and Macau during the week-long holiday. That was below expectations as “a seasonal surge failed to materialize” for the industry, according to Citigroup Global Markets.

“The sales of jewelry and valuable watches are good indicators of how strong the Chinese tourists’ purchasing power is,” Mak from the Hong Kong Retail Management Association said. “We expect some Chinese shoppers to cut back on big-ticket items as the wealth effect fades.”

Sa Sa International shares dropped 5.7 percent to HK$4.84, the biggest drop since Nov. 10, at the close of Hong Kong trading. Luk Fook closed 2.2 percent lower at HK$26.50.

The RQFII scheme was introduced last month to permit Hong Kong subsidiaries of Chinese fund companies and securities firms to raise renminbi offshore and invest back into the onshore securities market.

An initial quota of Rmb20 billion ($3.1 billion) was announced to be shared among firms approved for a licence, and already this sum has been allocated in full to 21 companies.

And at the forum Yao Gang affirmed that the China Securities Regulatory Commission (CSRC) is intent on expanding the programme.

Ben Zhang, joint managing director of Hai Tong International Asset Management, predicted the CSRC would unveil a second batch of RQFII quotas within six to nine months, with an amount exceeding the previous Rmb20 billion.

Having launched an offshore RMB fixed income fund only yesterday, Doris Lian, CEO of Da Cheng International AM, points out that expansion of the RQFII scheme will stimulate further growth in offshore RMB deposits, generating a need for more RQFII investment products.

CSRC’s efforts to push forward the RQFII programme are in line with Beijing’s drive to increase overseas investment this year and improve the structure of the domestic capital markets, including greater participation from institutional investors.

During a securities and futures regulatory meeting on January 9, CSRC chairman Guo Shuqing indicated plans to quicken the approvals process for qualified foreign institutional investor (QFII) licences and increase investment quotas, and at the same time enlarge the RQFII scheme.

And last weekend Dai Xianglong, chairman of the National Council for Social Security Fund (NCSSF), urged incremental expansion of QFII investment quotas and the eventual removal of quota restrictions.

He suggested that China learn from the experiences of other countries such as India in terms of opening up their domestic stock market to foreign investors and gradually increasing QFII investment quotas until the restrictions are finally abolished.

Close regulatory restrictions on foreign institutional capital could be replaced by the establishment of caps on each institutional investor’s holding of individual stocks, and that could be executed automatically in the trading process, Dai notes.

According to CSRC’s latest disclosure on December 13 last year, a total of 121 foreign institutions have obtained QFII licences. Korea’s National Pension System is among the latest batch to receive a licence

While designed to put a light-hearted spin on the bank’s predictions for the year — it does arguably make CLSA stand out among the numerous outlooks that are published this time of year — some people seem to take it quite seriously. According to Philip Chow, a transport analyst at the firm who preceded over the release of the 18th incarnation of the index yesterday dressed in a traditional Chinese silk jacket, when the stock markets collapsed in September last year he was getting emails from people asking whether things would improve in the year of the dragon.

And it seems this could well be the case. A mythological creature, the dragon is viewed as a major game-changer and in Chinese history it usually appears as a pre-curser of an event of great relevance, Chow told a packed room at the China Club in Hong Kong yesterday.

“The dragon represents a transition of power, a change between old and new and is always seen as an inflection point,” he said.

Thinking back to the previous year of the dragon in 2000, which coincided with the collapse of the internet bubble, inflection point and game changer sound about right. Luckily for investors, one has to view the zodiac sign in the context of the five elements as well, and that makes 2012 the year of the water dragon. The way to interpret this, according to CLSA and the feng shui masters it has consulted to compile its index, is that the dragon will emerge from the water in a move that will herald positive events ahead.

“The dragon is bold and when it surges, it surges big,” Chow said, although he did acknowledge that the dragon is also an unpredictable beast that spits fire when it is angry. So, investors need to watch out they don’t get burnt, he said.

The last time the water dragon emerged from the lake was in 1952 and while the Dow Jones index finished higher that year, the gains did not come without a struggle. When the dragon handed over to the snake early the following year, the index had risen only about 8%.

CLSA’s feng shui index suggests that it will take the dragon until August to accumulate enough energy to come out of the water. But after this inflection point has been hit, the dragon will “turn sharply and head north at a rapid pace.”

“If our readings are right, September should be one of the best months of the year, with plenty of activity in the markets,” CLSA said and added that the upward trend should continue through October and November. However, since apparently you can never see the head and the tail of the dragon at the same time, the rally should run out of steam come December, although the index suggests that the market will continue to shuffle sideways through to the end of January 2013.

This year is also more balanced in terms of the five energy elements, which suggests that the market will be less volatile in 2012 than it was last year. Fire is the only element that is not represented at all this year, but since fire subdues metal — think gold — this should be positive for the financial markets. That said, metal and earth are also lacking in the first half, which is why the positive breakout isn’t expected to come until the second half — indeed, as the dragon sinks back into the lagoon after chasing the rabbit back into its whole next week, the market may well continue to slide until July. In March, the best direction for money is west, which doesn’t bode well for Hong Kong. Although Chow noted on a direct question that this could perhaps also refer to western China as this region continues to develop.

According to Emily Lam, who normally works in institutional sales but yesterday doubled as Chow’s apprentice in outlining the feng shui predictions, the prevalence of water and earth will make this a good year for stocks related to these two elements, including cement, gaming, property, tourism and transport. Cement in particular is expected to fair “exceptionally well”, she said.

Given the dragon’s association with a transition of power, it is perhaps logical that this is the year for a leadership change in China. There are also a number of elections to be held this year, including the US presidential race. However, Chow refrained from making a call on whether the presence of the dragon means President Obama will fail to be reelected.

Curiously though, there is little in the charts to suggest a major change of fortune for Xi Jinping, a water snake who is widely expected to take over from Hu Jintao as general secretary of the Chinese Communist Party later this year — although there is a rather understated hint of a job opening in the autumn, the CLSA report noted.

“This isn’t slated to be his best year by a long shot,” it continued, playing on the Cantonese word for dragon, which is long. “Best not to cross him, though, if he is true to type: snakes always settle scores.”

In Germany, Angela Merkel, like all wood horses, is faced with the threat of “a shocker of a year” and the fact that her inner animal is the sheep doesn’t bode well in times of trouble. That said, the wood horse is one of the strongest and most determined signs with seemingly endless stores of patience, persistence and persuasion — even this sceptical reporter must admit that is spot on with regard to the German chancellor so perhaps there is something to this Zodiac thing after all. And encouragingly, wood horses are “known for making decisions that turn out to be spot on”. Let’s hope for the sake of the future of the euro-zone that this continues to be the case.

One person, who is expected to have a “fab” year during the year of the dragon is Queen Elizabeth II. A fire tiger, she will celebrate 60 years as head of state this year, which means she has been on the throne for one full 60-year cycle of the Chinese zodiac. Based on the feng shui principles, she has begun one of the luckiest periods of her life and the fact that water, which is so prevalent this year, is her lucky element is “simply icing on the cake”, CLSA said, referring to it as a “win-Windsor” situation.

The year of the dragon will replace the year of the rabbit on January 23

Based on my research and the annual Canada-China Energy & Environment Forum I have organized since 2004, eight specific factors explain China’s renewed interests in investing in the Canadian energy sector.

First, the Harper Conservative government changed its hardline policies toward China from early 2009 onward, and repeatedly assured Beijing that Canada welcomes Chinese investment. Such a policy shift is significant since China does not like to do business with politically unfriendly countries, be they democracies or dictatorships. There is a clear, well-documented correlation between Canada’s overall relations with China and the levels of Chinese investment in Canada: Chinese firms did not invest in the Canadian energy sector after the newly elected Conservatives removed China from its foreign-policy priority list. But since late 2009, Chinese money has flowed into Canada with the resumption of Canada-China summit diplomacy and an improved overall political relationship.

Second, the North American stock market has been low since the 2008 economic crisis, presenting buying opportunities for cash-rich Chinese firms and selling pressures for cash-strapped Canadian companies. Take Sinopec’s $2.2-billion purchase of Daylight Energy, the first 100% takeover of a North American energy firm by a Chinese oil company. The offer was $10.08 per share, more than double Daylight’s closing price of $4.59 prior to the announcement. While Daylight shareholders are happy with the generous offer, Sinopec looks for future growth beyond the total it put down. Another case is the nearly bankrupt Opti Canada Ltd., which was bought out by the third-largest Chinese energy company, China National Offshore Oil Corp. Opti was financially bailed out while CNOOC entered a joint-venture arrangement with Nexen Energy to keep the Long Lake project going.

Third, global oil prices remain high, making long-term extraction of oil sands and other Canadian energy resources sustainable and profitable. When Chinese oil majors began to come into Canada’s oil sands in the mid-2000, they were unsure whether the high oil prices represented short-term volatility or if they were there to stay. Plus with Canada’s complex and long regulatory process, high labour cost and lack of access to shipping large volumes of oil to the West Coast, they hesitated and waited. Now, there is enough confidence for oil sands development and the Chinese energy giants have taken their plunge into Canada. Sinopec’s 50/50 joint venture with Total in the Northern Light project is not expected to get to production until early 2020s, but it is moving forward.

Fourth, the ongoing turmoil in North Africa and the Middle East over the past year has taught Chinese investors a painful lesson: Putting your fortune into resource-rich but unstable states or into fast deals with dictators entails higher costs and greater risks. After Libya descended into civil war, the Chinese government had to mount an unprecedented mission to evacuate more than 35,000 of its nationals working in the country, and later, the Ministry of Commerce revealed that in Libya alone, China lost $18-billion in investments and ongoing projects. In a recent conference in Beijing, Zhang Guobao, who just retired as the head of China’s National Energy Administration and still serves as the chairman of the National Energy Security Advisory Committee to Premier Wen Jiabao, made it clear in his speech that countries such as Canada and Australia, both resource-rich and democratic, should top the Chinese FDI list.

Fifth, Canadian energy companies have become more competitive in their engagement with Chinese counterparts. It is true that Canada is richly endowed with energy and other resources while China needs energy and has a $3.2-trillion foreign reserve. And yet these are necessary, but insufficient, conditions for closer Canada-China energy cooperation. Canadian firms have learned that they need to be more assertive in competing with companies from other countries for Chinese investment. Up to three years ago, major Canadian oil producers were largely absent from the Canada-China Energy & Environment Forum. Now they are a major presence at this annual event. Media reports on Chinese investments in Canada have overlooked the fact that Canadians are now more proactive in courting the Chinese energy firms. Although facing many challenges in dealing with an emerging superpower with a different culture, Canadian energy company CEOs, many of whom have never been to Asia before, now fly to Beijing and other Asian capitals to pursue investments, joint ventures and other opportunities.

Sixth, the Chinese energy firms have emerged from the toddler stage to become bolder in conducting merger and acquisition and joint venture activities around the world. All the Canadian subsidiaries of the big three Chinese national oil companies are staffed primarily with technical people in charge of existing local operations. With more experience and better market information, Chinese energy M&A and JV teams are coming to Calgary more frequently. Not only have Chinese firms moved from minority holding positions to full ownership and operator status, as demonstrated by Daylight and MacKay River, they are also diversifying into conventional oil, gas and shale sectors from the large-scale oil sands focus.

Seventh, the growing Chinese interests in Canada’s energy sectors go beyond equity investment and production for profits. All the Chinese NOCs are aiming to become large integrated international companies that can compete with other well-established international oil companies. The management skills and technical know-how of extracting heavy oil and shale that the Canadian firms possess are exactly what the Chinese companies lack. With well over $24-billion invested in Venezuela’s heavy oil exploration and having a domestic shale reserve that is larger than both the U.S. and Canada combined, Chinese energy companies will benefit tremendously from their investment in the Canadian energy sector. Joint ventures with Canadian firms have also given Chinese access to the U.S. energy market, as demonstrated by the recent JV agreements between Nexen Inc. and CNOOC to develop two Gulf of Mexico plays, and the $2.5-billion deal between Devon Energy and Sinopec that gives the latter 30% ownership in five of Devon’s U.S. shale operations.

Finally, Canada’s recent Asian market diversification drive after the U.S. State Department delayed the approval of the Keystone XL pipeline has given Chinese energy companies further incentive to invest in Canada. Although keeping a low profile in the intensifying Canadian debate on building more pipelines to the West Coast, China and other Asian countries hope to have access to Canadian oil and gas in the near future. Sinopec has invested in Enbridge’s $100-million Gateway pipeline regulatory approval fund, as has MED Energy, in which CNOOC has had a stake since 2005.

If most of these conditions remain, and there is little indication that they will change in the short term, we can certainly expect more Chinese investment in Canada’s energy sector. The Chinese have obviously concluded that their investment in Canada is good for China. But are Chinese investments good for Canada? The debate on this question in Canada seems to have just begun.

“Innovation has underpinned our growth in the region and this first Innovation Lab in Asia underlines our continued investment in technology to support our clients and our growth,” said Anthony Nappi, Citi’s Asia-Pacific head of GTS, at the launch of the Innovation Lab in Singapore.

According to Citi, the Innovation Lab is fully interactive and globally-linked which allows the bank to connect with its clients, colleagues and experts through direct video and voice feed for discussions on future needs and collaboration. The bank says it currently has more than 10 clients that are collaborating on ideas and testing solutions for various business challenges using the Innovation Lab. These range from working capital solutions to cash forecasting.

“In a volatile and ever changing world it is important for clients to be able to test various scenarios and the impact they may have on their business,” said Nappi. “The Lab will play an important role in helping our clients navigate uncertain markets.” Nappi says the Innovation Lab overcomes the challenge of allowing clients to visualise new solutions that Citi develops for them. The process used to take weeks and months but can now be done in hours.

Citi employs 12 people including GTS product experts and people from outside the finance and banking industry in the Innovation Lab. The bank has partnered with the National University of Singapore (NUS) and the Infocomm Development Authority of Singapore (IDA) for the Lab. Academics from NUS contribute to developing and refining ideas for current projects, while the IDA helps accelerate the development and deployment of business analytics.

“A new duality — credit and zero-bound interest rate risk — characterises the financial markets of 2012, offering the fat left-tailed possibility of unforeseen policy delevering or the fat right-tailed possibility of central bank inflationary expansion,” wrote Gross in a letter to his investors last week. Gone is a world of muted Western growth, high unemployment and orderly delevering. Instead, we are confronted with a bimodal environment; a dichotomy of impending disaster caused either by deflation or inflation.

In the vernacular, investors are caught between a rock and a hard place.

One route for them to travel, albeit selectively and “on a tightrope”, is towards commodities, according to Michael Lewis, head of the commodities research team at Deutsche Bank. An inference of their analysis in a report released on Friday is that positive secular trends may override ephemeral disarray.

“Ten years ago commodity prices began their long march higher in response to strong demand growth across the emerging markets and years of underinvestment in new productive capacity. Since super cycles in commodity markets typically last up to 20 years, one could argue that we are only halfway through the current cycle,” said Lewis.

Nevertheless, he warned, there is now a serious caveat that means the sustainability of strong commodity prices is contingent on several policy decisions producing effective results.

The US Federal Reserve’s efforts to stimulate growth must be successful, China needs to engineer a soft landing and Europe’s disparate and divided leaders have to find a market-friendly solution to the region’s sovereign debt crisis.

“If unsuccessful then the implications for global growth and hence world commodity demand would be bleak,” said Lewis.

But emerging markets should mitigate some of that threat. Low outstanding debt levels across the emerging markets should help economic growth in the medium term, and that will support commodity demand. Authorities in these countries also have flexibility when it comes to deploying monetary and fiscal stimulus programmes.

Deutsche’s main investment and trading recommendation is the same one that reaped the best returns in 2011 and indeed during the past five years: following momentum. Total returns on the DB Commodity Momentum index rose by 9.3% last year, which was among the best-performing commodity indices. Since the onset of the financial crisis in late-2007, the performance of the index has also been strong.

The alternative, conventional plays — long-only commodity index strategies — will remain vulnerable to further disappointments in Europe and to the “tightrope the world economy is navigating between mediocre growth and recession”.

Specific factors will determine individual commodity sectors.

Geopolitical risks, restricting supply from the Middle East and elsewhere, should outweigh the potential downside on crude oil prices from a sluggish global economy. Inventories are quite low, while supply and demand fundamentals indicate that Opec spare capacity will decline over time.

“Historically, headwinds for commodity prices and specifically oil prices start to appear when world growth falls towards 2.5%. These are environments which typically trigger Opec production cuts of as much as 4 million barrels per day,” said Lewis. On the other hand, a recession in Europe would slow demand for power and cap gas prices.

Negative real interest rates are likely to support a recovery in the gold price, which fell during the past few months as part of a “broader deleveraging trend in global ‘safe-haven’ trades”. It will be further boosted by central bank diversification, resumption in US dollar weakness later in the year and continuing uncertainty about the European financial system. But Deutsche’s top pick among precious metals is palladium “given its bias to the US and China”.

Of course, base and industrial metal prices are more dependent on economic activity — and particularly Chinese demand. Deutsche says that near-term deflationary fears may continue to depress pricing for the base metals complex in the first quarter of this year, but that accommodative monetary policy could successfully jump-start global growth and lead to stronger prices later in the year. The bank favours aluminium and copper prices, which have the lowest correlations to the S&P500 and will benefit as China embarks on another round of fiscal stimulus, which would include more housing construction.

Initially, the prices of some agricultural commodities — especially soybean and corn — are likely to be supported by the La Niña weather effect (a phenomenon that cools the Pacific Ocean off the west coast of South America), but will, in general, fall during most of 2012. But low inventories, adverse weather conditions, high oil prices and government intervention are likely to make the sector prone to price spikes.

Certainly, secular trends — mainly the structural shift in demand that is feeding, fuelling and building new industrialised and urban communities in many parts of the world, and especially China — provide a long-term case for investing in commodities. But the short-term matters more for investors

Riding periodic momentum may be one way to bridge the gap between temporary uncertainty and enduring confidence.

In an investment landscape more uncertain than usual, asset allocators and fund managers have a tough year ahead. Any outlook for conventional financial instruments – stocks and bonds – needs to be predicated on a view of the world that has, in the words of bond market sage, Bill Gross, managing director of PIMCO, shifted from the “New Normal” to the “Paranormal”.

“A new duality – credit and zero-bound interest rate risk – characterises the financial markets of 2012, offering the fat left-tailed possibility of unforeseen policy delevering or the fat right-tailed possibility of central bank inflationary expansion”, wrote Gross to his investors last week. Gone is a world of muted western growth, high unemployment and orderly delevering: instead we are confronted with a bimodal environment, a dichotomy of impending disaster caused either by deflation or inflation.

In the vernacular, investors are caught between a rock and a hard place.

One route for them travel, albeit selectively and on a tightrope, is towards commodities, according to David Lewis, head of the commodities research team at Deutsche Bank. An inference of their analysis in a report released on Friday, is that positive secular trends might override ephemeral disarray.

“Ten years ago commodity prices began their long march higher in response to strong demand growth across the emerging markets and years of underinvestment in new productive capacity. Since super cycles in commodity markets typically last up to 20 years, one could argue that we are only halfway through the current cycle,” said Lewis.

Nevertheless, he warned, there is a now serious caveat that means that the sustainability of strong commodity prices is contingent on several policy decisions producing effective results.

The US Federal Reserve’s efforts to stimulate growth must be successful, China needs to engineer a soft landing and Europe’s disparate and divided leaders have to find a market-friendly solution to the region’s sovereign debt crisis.

“If unsuccessful then the implications for global growth and hence world commodity demand would be bleak,” said Lewis.

But, emerging markets should mitigate some of that threat. Low outstanding debt levels across the emerging markets are constructive for the medium term GDP and commodity demand growth outlook. Authorities in these countries also have the flexibility when it comes to deploying monetary and fiscal stimulus programmes.

Deutsche’s main investment and trading recommendation is the same one that reaped the best returns in 2011 and indeed during the past five years: following momentum and taking advantage of positive carry differences. Total returns on the DB (Deutsche Bank) Commodity Momentum index rose by 9.3% last year, which was among the best performing commodity indices. Since the onset of the financial crisis in late-2007, the performance of the index has also been strong.

The alternative, conventional plays – long-only commodity index strategies – will remain vulnerable to further disappointments in Europe and to the “tightrope the world economy is navigating between mediocre growth and recession”.

Specific factors will determine individual commodity sectors.

Geopolitical risks, restricting supply from the Middle East and elsewhere, should outweigh the potential downside on crude oil prices from a sluggish global economy. Inventories are quite low, while supply and demand fundamentals indicate that OPEC spare capacity will decline over time.

“Historically headwinds for commodity prices and specifically oil prices start to appear when world growth falls towards 2.5%. These are environments which typically trigger OPEC production cuts of as much as 4 million barrels per day,” said Lewis. On the other hand, a recession in Europe would slow demand for power and cap gas prices.

Negative real interest rates are likely to support a recovery in the gold price, which fell during the past few months as part of a “broader deleveraging trend in global ‘safe-haven’ trades. It will be further boosted by central bank diversification, resumption in US dollar weakness later in the year and continuing uncertainty about the European financial system. But, Deutsche’s top pick among precious metals is palladium “given its bias to the US and China”.

Of course, base and industrial metal prices are more dependent on economic activity – and particularly Chinese demand. Deutsche believes that near-term deflationary fears may continue to depress pricing for the base metals complex in the first quarter of this year, but that accommodative monetary policy could successfully jump start global growth and lead to stronger prices later in the year. The bank favours aluminium and copper prices, which have the lowest correlations to the S&P500 and will benefit as China embarks on another round of fiscal stimulus, which would include more housing construction.

Initially, the prices of some agricultural commodities – especially soybean and corn  - are likely to be supported by the La Niña weather effect (a phenomenon that cools the Pacific Ocean off the west coast of South America), but will, in general, fall during most of the 2012. But, low inventories, adverse weather conditions, high oil prices and government intervention are likely to make the sector prone to price spikes.

Certainly, secular trends, that is the structural shift in demand that is feeding, fuelling and building new industrialised and urban communities in many parts of the world, and especially China, provides a long-term case for investing in commodities. But, the short-term matters more for investors

And “all hopes for the commodity complex, and specifically energy and industrial metals demand rest on US growth remaining positive, China avoiding a hard landing and a market friendly solution to Europe’s sovereign debt crisis,” said Lewis.

But, riding periodic momentum might be one way to bridge the gap between temporary uncertainty and enduring confidence.

While most countries have lower consensus growth forecasts for 2012, the US, Japan and India are all expected to grow faster — by 2.1%, 2% and 7.5% respectively, as opposed to 1.7%, -0.6% and 7.2% in 2011.

The eurozone is already in recession and its growth forecast for this year is negative, according to Philip Poole, global head of macro and investment strategy team at HSBC. “It is not a problem that is not going away, it is a problem that is going to take a long time,” Poole added. “I think the problem we have in the eurozone is probably a 10-year type of problem.”

Recent US economic statistics have signalled stronger growth, but the political paralysis may take a toll and undermine fiscal sustainability. Despite the declining fiscal deficit since 2009, gross general government debt as a percentage of the country’s gross domestic product has continued to rise.

“There is no sign yet that the paralysis has come to an end, and in fact it is very unlikely that anything will be done until after the election,” said Poole.

Growth in Asia will slow down, but is still expected to be growing much more quickly than the developed world. “The problem in the emerging world in 2011 was inflation but as the economies slow, including China, the inflation concern is going away,” Poole said. “That is good news in a sense, because these economies have been growing too rapidly, unsustainably rapidly.”

Diversification is important in hard times, but Poole stressed the difficulty in doing so thanks to the high correlation between markets. “Diversification has almost become like a binary decision between risky and safe-haven assets,” he said.

However, for medium- and long-term investors, HSBC says there is significant value in corporate credit in both developing and developed markets, UK gilts and German bunds. Supported by strong balance sheets, investment-grade corporate spreads have widened to above 300 basis points from around 200 in March 2011.

“This spread has widened relative to treasuries not because corporate fundamentals are suffering, but because we have been in this risk-off environment and everything has sold off pretty much together,” said Poole.

Asian equities also offer significant value. “At the moment you have got an opportunity to buy the market at a cheap level when they are still very profitable,” said Bill Maldonado, Asia-Pacific strategy chief investment officer at HSBC global asset management. “We do not expect profitability to collapse at all; we actually expect it to be quite robust.”

Asian equities have suffered from similarly low valuations during previous crises, but in those cases, profitability also suffered.

According to HSBC, Asian equity investors would have an 85% possibility of enjoying a positive return of above 30% if they bought at a price-to-book ratio of between 0.8 times and 1.5 times, with a view to holding for one year. The MSCI Asia ex-Japan Index is trading at around 1.5 times, compared with a minimum of 1.2 times during the global financial crisis.