Or is it a case of a massive bubble and anyone who jumps on now will lose out?
KEY POINTS:
Kiwis are having trouble coming to terms with a financial world changing more rapidly than anyone could have imagined.
First there was the international credit crunch, which caught even the experts napping. Then followed price rises on basic commodities that have milked our wallets and purses.
Last week I flicked on the television to see a clip of people's shocked reactions at the pump when petrol hit $1.20. It seems like ancient history now. Who could have guessed that little over a year later we'd be paying $2 a litre for petrol or $5 for a standard 500g pack of butter?
There's always a silver lining to a cloud and someone has to be making money out of these massive price rises. Sure it costs more to fill up a farmer's tractor with diesel, and shipping charges on oil will have increased. But there still has to be some cream on top.
As Diversified Investment Strategies' analyst Norman Stacey says: "If you have petrol shares you shouldn't bitch too much about the petrol you buy for your car going up because your portfolio has soared."
So to the investment point: what are the sectors that are likely to be the winners in this new topsy-turvy world, which many of us are still to comprehend?
Or is it a case of a massive bubble in commodity prices and anyone who jumps on the bandwagon now will lose out?
Not so, says Janine Starks, investment director of fund house Liontamer, who believes higher prices of commodities are here to stay. "We'll still see cycles within this, but there is an over-riding long-term up trend."
On the other hand, Stacey reckons that the "new paradigm" that many are talking about is simply that inflation is back. "These are all cycles and the idea is to play them in your portfolio," says Stacey.
Those sectors that could be good plays, says Starks, may include:
* Commodities
* Emerging markets
* Companies involved in climate change issues
* Banks and blue chip companies
Commodities
Commodity prices have shot up beyond all expectations. But are the markets simply in a speculative bubble? Says Starks: "We are in one of the longest sustained rallies ever seen, for energy prices, and I believe it will continue because of fundamental supply and demand issues which are not going away."
Food prices are another long-term story, says Starks, and their price rally may be only in its infancy. "We currently have a Food & Fuel fund available for investors, where they can invest in oil, natural gas, wheat, sugar, soya and corn."
Such foods aren't just used for eating. In our new world sugar, soya and corn, for example, can be used to make biofuels such as ethanol, which shows just what a wide brim an investor's thinking cap needs to have.
It needs to be noted that while commodity prices have soared, related equities haven't hit the same highs. Exxon's shares, for example, haven't soared to anywhere near the highs of crude oil.
Some of these stocks operating around the commodities markets will prosper. Yet investors do need to beware of bubbles, says Stacey. "[The commodities market] feels bubblish to me right now. That's not to say that the bubble's size couldn't double."
Several key commodity prices, including crude oil, copper and milk solids, seem priced much higher than fundamentals alone would dictate currently," he says. "Maybe there is some speculation, but if so it will correct."
Investors might be best leaving betting on the future commodity prices for the traders and speculators, he says. "If oil or dairy commodities are in price bubbles, it is a lucky trader's game guessing just how big those bubbles will get."
Climate change
We hear constantly how costly climate change will be. But the capital markets tend to be very efficient and where there is a problem, there is also an opportunity for investment, says Starks.
Clean water is one resource that is likely to be hard hit by climate change and is said by some to be the oil of the 21st century - a commodity that will grow ahead of the curve. Those companies that make money by providing it, desalinating it, dealing with waste water treatment, or making pipes, pumps, valves, chemical or biological filtration technology, water metering and other related products and services could have a rosy future.
"We also have strong and similar views on alternative energy - solar power, biofuels, wind power, wave power etcetera, and believe these equities will outperform," says Starks.
Emerging markets
As goods and services become more expensive but consumers resist price changes, businesses will look to cut costs - often turning to cheap labour countries for production. As a result well chosen companies operating in the BRIC countries - Brazil, Russia, India and China - could prove to be good investments.
"Adding to this we keep a watchful eye on the 'N-11', a term created by Goldman Sachs to describe the next 11 emerging economies with 'BRIC-like features'," says Starks. "South Korea is one of the N-11 we've already invested in."
The low-ish wage, highly educated markets of Central and Eastern Europe may also provide investment opportunities.
Banks, blue chip companies
These stocks aren't necessarily going to be the winners in our new world. But they've been thrashed - losing two to three times more in market capitalisation than the value of their credit losses. While many global banks are down between 30 and 50 per cent, the general MSCI World Index is only down 4 to 5 per cent. At some point they're likely to rebound.
"We think people have not got their eye on the ball on this one. There is a global stock-take sale going on out there and investors are not seeing it," says Starks. It's a case of needing to look behind you as well as in front, for opportunities created from the credit crunch.
Stock picking isn't the full story, says Stacey. Investors need to be wary of the New Zealand dollar. "If it falls by a third then petrol could hit $3 a litre at the pump."
Nonetheless, to take advantage of the very changed world we live in, Stacey recommends investors cast their eye towards forward-looking established global equity funds that position themselves to take advantage of the future, rather than follow yesterday's winners on an index.
He recommends including a significant allocation to gold and to gold producers' shares, as a counter to rising inflation.
Investors should also be wary of international investments hedged back to the New Zealand dollar, says Stacey. Should the dollar fall, as many predict, the gains from international share portfolios could be lost.
Another option is to buy New Zealand shares that stand to benefit from a lower currency or higher commodity prices. They could include Pike River Coal, NZ Oil and Gas, Sanford and even the Ports of Tauranga, thanks to the flow of commodities through it.