Commodity market is a hot favourite for investors

Dear Readers,
When Indian Equity Market is on its rough stage , I find commodity a good opportunity. I just posted an article regarding the same in www.commodityonline.com , sharing with you all…

Economic reforms in developing nations, insatiable hunger for the commodities worldwide, recession in US economy and tumbling dollar, turmoil in credit market, unpredictable stock market, on the contrary, rock solid performance of commodities and their record breaking prices, increasing income of people, new reforms in Indian commodity market ……….is this the perfect time to incorporate commodities in portfolio as a hot investment avenues.

Commodities boom appears far from over, rather there is a belief that what happened in past is just the beginning, at the time when other investment classes are not looking so promising. Moreover, strengthening regulatory body and taking various steps to nurture this market in India are expected to herald revolution in futures market and carry this forward to the fragmented physical market for commodities.

The Paradigm Shift
Earlier, while the global commodity markets were doing the experimentation with various new products and forms of derivatives, our commodity market was in a state of flux due to managerial and policy-induced constraints. Commodity market was never allowed to grow properly. Continuous interventions by the government and regulatory bodies have hampered its normal growth.

But, the recent welcome steps to strengthen commodities market in India are the encouraging signal to the investors that could result in broad-based involvement of players who matter rather than a handful of speculators. The move to arm FMC (Forward Market Commission) with more power and other revolutionary developments, which have already taken, viz., increases of position limits; revision of daily circuit limit etc. has rejuvenated the confidence of investors.

Additionally, it is also on card to launch new product innovations like option trading, trade in intangible products; like frieght, portfolio management, which is already very popular in the capital market, will provide more maturity to the market and increase corporate as well as retail participation in future. The country became the first in Asia to offer trading in carbon credits – an exchange of cash for costs saved from using environmentally friendly practices and products.

Ordinance (Forward Contracts Regulation Amendment Bill, 2006) has been passed to give FMC the status of independent regulatory body, is a silver lining to the commodity markets that might pave way for “transition towards a more mature market”. With the increased position limit in many commodities, big companies, which were reluctant to participate aggressively, hampered by low position limits, will now use exchanges to hedge. One can notice the increase in volume, which we can say is the evidence of rising faiths in commodity trading.

Forward Contracts Regulation Amendment Bill, 2006, will open the door for much awaited opportunities in commodities world in India. This bill will elevate the FMC to a government body to an independent regulator, like SEBI. Now, banks, foreign funds and other financial institutions (FIs) can also look forward to participation in commodity markets, which would bring more liquidity and better practices into the market.

Step to allow 26% FDI and 23% FII in commodity exchanges will bring significant resources to the commodity exchanges. Investors are desperately waiting for the allowance of option trading in commodities. The commencement of option trading will facilitate market participants, especially corporate to define their risk exposure, as this platform allows them to cover their loss after paying a pre-fixed premium.

There are some key challenges in Indian market firstly, to integrate the futures market with the spot market and going forward integrating the Indian commodity market with the global market. As funds flawlessly flow from one market to the other and the Indian commodity market begins to integrate with the global market. There are some challenges in commodity exchanges, which are crucial for a mature market. Lack of quantity and quality warehouses is a major drawback in Indian commodity markets. But, the government is pondering to allow 100% FDI in warehousing and the cold storage sector.

Future market is under the regulation of FMC while cash market is still under the governance of state government. This bifurcation of regulation has led to fears that it could result in “regulatory slippages and contradictions”. Out of 28090 rural markets (Wholesale 6359, rural primary 21731) only 7557 markets (Principal 2428, sub markets 5129) are regulated by Agriculture Produce Marketing Regulation Acts of various states.
As regards commodities performance, the upward stride of the commodity market, a journey that commenced sometime in 2003, has gained unprecedented momentum till now. Bull-run in a number of commodities including energy, base metals, precious metals and agricultural goods could be attributed to both demand and supply side factors. Investment of forex, mutual fund, pension fund, etc. in commodities, especially in gold is making this market wonderful. Mutual funds and pensions funds that have humungous sums of money (pension funds in the US is alone are estimated to have over $ 2 trillion) are seeking to invest in commodities. Central banks of Asia, Russia, Japan is reportedly looking for asset diversification in gold.

The long-term fundamentals of most commodities are trustworthy. The world’s population and infrastructure is growing at a rapid pace and will continue to require massive quantities of natural resources to meet growing demand. Population growth means that by 2020 the world will need 40% more food. And in Asia, which is considered as “movers and shakers” in the commodities, growth has only just begun. So for investors looking to tap into the commodities markets, it is simply a matter of knowing how and where to invest.

India is considered as a major futures trading hub in tune with its status of being amongst the top five producers of most of the agro commodities. No need to say that, in precious metals, we are the largest consumer, contributing 30-35% of the total world demand. With the advent of big supermarket chains, warehousing facilities are expected to get better.

Trading volume in Indian commodity exchanges, which has ballooned 50 times in just five years, has potential to become almost double in size within the next two years.

In our country, commodity related industries roughly contributes around 55% of the total GDP and the turnover of commodity future market of 2006-07 is Rs. 32,32,943 crore, which is growing at a much faster than the stock market.

To conclude, I would like to say, commodities are not just a good way to diversify a portfolio of stocks, property and bonds; they often offer superior returns and significantly they are not correlated to stocks and bonds. Bull markets in commodities goes along with by bear markets in stocks, and vice versa. Positive correlation of commodities with inflation has already made it hot favourite of investors. Hence considering higher worldwide inflation, comparatively weak performance of other asset classes together with rock solid fundamentals in commodities, one can diversify their portfolio in commodities.