The mood always gets jittery when the stock market is at an all-time high and threatening to cross another peak. The market has already gained around 26% from the end of the last year and this seems to be a tad excessive than what even the most optimistic can be comfortable with. The markets, now many believe, are due for a correction. While this belief may be tested in the coming months, there are enough signals that suggest now maybe a good time to diversify and get in some protection in case of a downside.
While the equity story will remain to be robust in the long-run, and investors are advised to allocate a major portion of the portfolio to equities, it is the smaller portion that needs to be taken care of. Wealth managers strongly believe that even though the market is booming, now is a good time to allocate assets in other avenues, especially if you have a full equity portfolio.
So while there is the usual diversification to debt-based instruments, the commodity sector also offers several opportunities. And this avenue has been seeing an increasing influx of high net worth individuals taking an exposure. But a large number of people prefer to stay away. ?I have been told that there is nothing called commodities investing, it is just smart trading and more often gambling? says Jyoti Thakkar, a successful entrepreneur and an avid investor who has seen her portfolio grow ten-fold in the past five years.
And Thakkar is just one of the many HNIs who have been misinformed about commodity investing. Then there are others who have burnt their fingers in this avenue and are reluctant to come back. ?I was advised to take position in sugar futures and since sugar prices tumbled, I had to take huge losses,? says R Chintaman, a senior executive in a multinational. A traditional equity and real estate investor, ventured with huge funds to gain from the sugar price growth only to discover that India had a bumper crop and global prices also crashed.
All these factors have led to many opportunities being let aside, especially in metal commodities. Most of the non-ferrous metals like aluminium, tin, zinc and lead are in their most virtuous cycle where returns have been more than just smart. Tin has been the leader of the pack with a return of almost 32%, on a year-on-year basis. And while aluminium seems to have cooled off and returns just about 3% on a year-on-year basis in the month of September, its average monthly gain for the past year has been around 17% and has gained 48% in the past three years. Not to mention the ever favourite precious gold, which has been on a steady climb for the past couple of years.
Metal advantage
Analysts expect the trend in commodity prices to hold, especially in India. Francisco Blanch, head-global commodities research, Merrill Lynch, in an interview to Financial Times said, ?Commodity booms or commodity investment ?super-cycles,? as we like to refer to them, occur every 25 to 40 years, and there are always different factors driving them.
In the most recent one, we are seeing strong demand growth in energy and metals commodities, primarily driven by China and other emerging markets around the world. This has been backed up by strong growth in developed economies, such as Europe and North America. With world GDP growth running at nearly 5%, we are currently witnessing the strongest, steadiest, longest global economic cycle since the 1960s.?
While some hard core analysts believe that investors might have missed the boat as commodity prices have started climbing long ago and they might be peaking now and investors could end up buying at the top of the market. Yes, prices have climbed since the past three years, secularly across metal commodities and they are expected to stay buoyant.
?We have a major investment backlog across most commodity sub-sectors after over 20 years of low and range-bound commodity prices. You will only get a permanent downward correction in prices when the commodity markets become oversupplied. With resource nationalism on the rise and the limited investment that the sector is currently attracting, I think the cycle could last for at least five to 10 more years,? Blanch added.
Jim Rogers, a commodity investment guru, believes that most metal commodities are still far away from their historical peaks and therefore with rising economic activity, they are bound to climb. He also expects that there would be corrections on the way to the top. ?The Fed rate cut will create inflationary pressure and this will mean that commodity prices will rise,? he added.
From an Indian perspective, metal commodities, both ferrous and non-ferrous and precious metals are considered to be a better bet than agri-commodities. Not to say that there are no opportunities there. Analysts and trade experts fear government interference into agri-markets could send all calculations and forecasts into a tizzy.
Moreover, there are relatively few dynamics that are applicable to the metal industry that makes it an easier place to start a commodity exposure than other commodities, believes a fund manager.
The enablers
For investors, several brokerage houses have lined up commodity trading facilities on the national commodity exchanges. Most of them are members on both the exchanges. It requires visiting a broker and getting to know the formalities, which are quite the same as opening a stock broking account. However, each broker offers a set of facilities that will enable you to leverage margins, in case you are interested in playing the speculation game. Mostly the brokerage houses also provide strong in-house research that could help you take decisions.
The recent move by Reliance Money to tie up with CMC Markets of the UK will also enable you to trade directly on the London Metal Exchange or any other major commodity exchange, as a part of your allowance of remitting $200,000 in overseas investments. Even here, the documentation is not cumbersome and there have been examples where investors have gained from overseas deals. In addition, the company also offers systematic training facilities to enhance your knowledge.
You could also have your wealth manager take positions in the commodity markets on your behalf. At the moment, wealth managers have not been active on the commodity front. ?It is the lack of products that does not allow us to factor in the risk-reward numbers and therefore we are not comfortable advising our clients on taking commodity exposure,? says Amit Sarup, head-wealth management, Religare Securities.
But he strongly believes that commodity investing has a very strong future and that within a year, there would be more numbers rushing in to participate in this opportunity.
For investors in gold, there already exist gold exchange traded funds and these have been well received. In fact, a couple of weeks ago, these funds even outperformed the Sensex. And the national exchanges have futures contracts on silver as well.
Precautions
However, like any other investing opportunity, there are risks that investors should be aware of. Primary amongst them is the need to really get a hang of the investing know-how on commodities (see box along side). All fund managers and wealth managers seem to suggest the need to go slow with investing in commodities. ?There are not many people in the market with really great experience of investing in commodities,? says Sarup and this is one of the reasons why he would rather refrain from advising clients to build a large exposure to commodities.
Additionally, there is a thin line between trading and investing in the commodities market.
At the moment, the skew is more towards trading in futures. Usually the thin line diminishes and investors tend to get into the rut of daily profit and loss booking. This is not advised, unless you are a professional and have the requisite information to take those decisions. So the easy way is to take small positions in the futures markets and keep rolling them, reckons a financial planner. Gold ETFs are always a decent choice.
Asset managers strongly believe that metal magic will surely provide investors with a hedge. The opportunity is here to stay and will only get bigger. So a savvy move would be to dedicate a small portion, say 2 to 5% to metal commodities and start getting a hang of the dynamics. As new products get introduced and system dynamics improve, you would be ready to make the most.