Source: The Economic Times.
Commodity futures offer greater returns than those from equities, but find no place in the portfolio of retail investors. It's high time investors changed their world view.
It's time for a rejig. For long, investment portfolios in India have been dominated by equity, fixed deposits, real estate, jewellery and bonds. Now's the time to stand up and say 'In Gold we trust'. As the market turns volatile and uncertain, investors can look for lucrative options in the commodities futures market. The futures market kicked back to life in '03 after a four-decade ban, opening up a new range of investment opportunities. It's rather paradoxical that though the futures market offers a depth not found in equities, commodity stocks are missing from the portfolios of most retail investors.
Commodities like crude oil and steel respond to global cues, and investing in them give exposure to global growth. They also take care of inflation - a definite advantage over most other asset classes. It has been proven that gold beats inflation by a safe 2%. And if you go by what international commodity expert Jim Rogers said last year, "the global bull run in the commodities market has at least eight more years to run and may not lose steam until 2022."
Commodity derivatives are traded on the Multi Commodity Exchange of India (MCX) and the National Commodity Derivative Exchange of India (NCDEX). The commodities traded include gold, silver, agricommodities including jute, onions, sugar, grains, pulses, spices, oils and oilseeds, mentha oil, metals, natural gas and crude. There are 72 listed commodities, but only 15 of them are actively traded. The size of the domestic commodity market is over Rs 33 lakh crore, compared to Rs 5.7 lakh crore in the initial years. The average daily turnover is Rs 20,000 crore, against Rs 50 crore in '03. Gold alone accounts for 28% of the traded volume, whereas all the 11 agricultural commodities account for another 28% of the total volume.
By buying in the commodities market, investors can hedge their investments in the stock market. For example, if steel prices are expected to increase in the near future, selling stocks of companies which use steel as raw material and buying steel futures in the commodity market will help lock in high returns. Keeping in mind factors like volume on the exchange, volatility and past track record, ET has identified some commodities that offer investment opportunities.
Gold
Regarded as the safest haven, gold is also a good inflation hedge. With the dollar in doldrums, many economies are voting in favour of the gold standard. The supply of gold has been declining since the past five years. Net oil exports as a percentage of GDP of the US and Asia-Pacific are back to 1970-1980 levels and any persistent rise in energy prices will throw global growth out of its trajectory, while fully supporting the precious metals. The launch of ETFs will require almost 600 tonnes of gold and this will convert into a 5% incremental demand each year for the next three years. Fund allocation for gold as an asset class has risen to 10% from 5%. Though gold peaked to $725 an ounce last year, prices don't seem to be settling down in the near future. From last year's average of $608, gold could average out at approximately $665-670 levels.
Agri Commodities
The geographical division of land between the Northern and Southern Hemispheres, as well as different planting and harvesting seasons, make agri-commodities a short-term bet for not more than three months. Indian crop is also divided between rabi and kharif cycles. Hence, we cannot ignore them.
Cotton
By April-May, the acreage for cotton in the US is expected to shrink; hence the surplus available for export will be lower. The Indian arrival for '07-08 is also expected to be slow. However, China's demand is expected to pick up, keeping the price of global cotton firm. It is expected to peak up to 58-60 cents a pound by September.
Soy Seed/Oil
The soybean harvest from South America will start coming in by next month. The growth of the biofuel industry in major economies like the US and EU has given a boost to edible oil prices. Soy oil prices in '06 have shown a clear uptrend, which is still intact. Since India imports a major chunk of its palm oil from Malaysia, the price trend in palm oil also affects local soy oil prices. Palm oil is a substitute for soy oil and fluctuation in the price of either oil changes the demand pattern to some extent. The expectation of oil seed shortage in '07 could make the supply of vegetable oils a lot tighter. Also, the diversion of these oils towards making biofuels will increase the demand to a great extent. The emergence of new demand and overall shortage of supply in '07 is expected to keep soy oil prices firm.
Jeera
The West Asian crisis has blocked the cumin seed export route from Syria, diverting trade to India. Recent unseasonal rains in the North also played havoc with the crops. So, surging demand is likely to tighten domestic prices.
Pepper
Global markets are likely to witness a short supply as Vietnam - the largest producer and exporter of pepper in the world -is not releasing production. In India, farmers have shifted to alternate crops, so production is low. Since the quality of Indian pepper is very high, there is pressure from the global market. This will impact prices positively. Uncertain weather behaviour will have an important bearing on expectations for all agri-commodities . Hence, ideally, an exposure of not more than three months is suggested.
Non-Ferrous Metals
Zinc & Nickel: They are used as alloys for manufacturing stainless steel. The rapid industrialisation of China and India and infrastructure requirements in East European countries are boosting stainless steel demand. Such strong demand will choke supply and lead to price spikes. The London Metal Exchange inventory, at one day's average consumption, is at an all-time low. The demand from developing nations will drive metal prices higher. Although a cooling effect can be seen in the commodity market compared to last year's flush, it's far from over. The current slowdown in the market is the outcome of the ongoing consolidation. Increasing company expenditure, shortage of mining supply, entry of FIIs and increasing monetary inflationary trends will keep the commodity market on a high.
Commodity futures offer greater returns than those from equities, but find no place in the portfolio of retail investors. It's high time investors changed their world view.
It's time for a rejig. For long, investment portfolios in India have been dominated by equity, fixed deposits, real estate, jewellery and bonds. Now's the time to stand up and say 'In Gold we trust'. As the market turns volatile and uncertain, investors can look for lucrative options in the commodities futures market. The futures market kicked back to life in '03 after a four-decade ban, opening up a new range of investment opportunities. It's rather paradoxical that though the futures market offers a depth not found in equities, commodity stocks are missing from the portfolios of most retail investors.
Commodities like crude oil and steel respond to global cues, and investing in them give exposure to global growth. They also take care of inflation - a definite advantage over most other asset classes. It has been proven that gold beats inflation by a safe 2%. And if you go by what international commodity expert Jim Rogers said last year, "the global bull run in the commodities market has at least eight more years to run and may not lose steam until 2022."
Commodity derivatives are traded on the Multi Commodity Exchange of India (MCX) and the National Commodity Derivative Exchange of India (NCDEX). The commodities traded include gold, silver, agricommodities including jute, onions, sugar, grains, pulses, spices, oils and oilseeds, mentha oil, metals, natural gas and crude. There are 72 listed commodities, but only 15 of them are actively traded. The size of the domestic commodity market is over Rs 33 lakh crore, compared to Rs 5.7 lakh crore in the initial years. The average daily turnover is Rs 20,000 crore, against Rs 50 crore in '03. Gold alone accounts for 28% of the traded volume, whereas all the 11 agricultural commodities account for another 28% of the total volume.
By buying in the commodities market, investors can hedge their investments in the stock market. For example, if steel prices are expected to increase in the near future, selling stocks of companies which use steel as raw material and buying steel futures in the commodity market will help lock in high returns. Keeping in mind factors like volume on the exchange, volatility and past track record, ET has identified some commodities that offer investment opportunities.
Gold
Regarded as the safest haven, gold is also a good inflation hedge. With the dollar in doldrums, many economies are voting in favour of the gold standard. The supply of gold has been declining since the past five years. Net oil exports as a percentage of GDP of the US and Asia-Pacific are back to 1970-1980 levels and any persistent rise in energy prices will throw global growth out of its trajectory, while fully supporting the precious metals. The launch of ETFs will require almost 600 tonnes of gold and this will convert into a 5% incremental demand each year for the next three years. Fund allocation for gold as an asset class has risen to 10% from 5%. Though gold peaked to $725 an ounce last year, prices don't seem to be settling down in the near future. From last year's average of $608, gold could average out at approximately $665-670 levels.
Agri Commodities
The geographical division of land between the Northern and Southern Hemispheres, as well as different planting and harvesting seasons, make agri-commodities a short-term bet for not more than three months. Indian crop is also divided between rabi and kharif cycles. Hence, we cannot ignore them.
Cotton
By April-May, the acreage for cotton in the US is expected to shrink; hence the surplus available for export will be lower. The Indian arrival for '07-08 is also expected to be slow. However, China's demand is expected to pick up, keeping the price of global cotton firm. It is expected to peak up to 58-60 cents a pound by September.
Soy Seed/Oil
The soybean harvest from South America will start coming in by next month. The growth of the biofuel industry in major economies like the US and EU has given a boost to edible oil prices. Soy oil prices in '06 have shown a clear uptrend, which is still intact. Since India imports a major chunk of its palm oil from Malaysia, the price trend in palm oil also affects local soy oil prices. Palm oil is a substitute for soy oil and fluctuation in the price of either oil changes the demand pattern to some extent. The expectation of oil seed shortage in '07 could make the supply of vegetable oils a lot tighter. Also, the diversion of these oils towards making biofuels will increase the demand to a great extent. The emergence of new demand and overall shortage of supply in '07 is expected to keep soy oil prices firm.
Jeera
The West Asian crisis has blocked the cumin seed export route from Syria, diverting trade to India. Recent unseasonal rains in the North also played havoc with the crops. So, surging demand is likely to tighten domestic prices.
Pepper
Global markets are likely to witness a short supply as Vietnam - the largest producer and exporter of pepper in the world -is not releasing production. In India, farmers have shifted to alternate crops, so production is low. Since the quality of Indian pepper is very high, there is pressure from the global market. This will impact prices positively. Uncertain weather behaviour will have an important bearing on expectations for all agri-commodities . Hence, ideally, an exposure of not more than three months is suggested.
Non-Ferrous Metals
Zinc & Nickel: They are used as alloys for manufacturing stainless steel. The rapid industrialisation of China and India and infrastructure requirements in East European countries are boosting stainless steel demand. Such strong demand will choke supply and lead to price spikes. The London Metal Exchange inventory, at one day's average consumption, is at an all-time low. The demand from developing nations will drive metal prices higher. Although a cooling effect can be seen in the commodity market compared to last year's flush, it's far from over. The current slowdown in the market is the outcome of the ongoing consolidation. Increasing company expenditure, shortage of mining supply, entry of FIIs and increasing monetary inflationary trends will keep the commodity market on a high.
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