Mumbai: With stock markets losing their sheen, traders seem to have started looking for greener pastures, especially in commodities.
The benchmark index of the Bombay Stock Exchange, Sensex, is down 22% from its peak on 10 January. It has fallen some 21% since the begining of the year, after offering more than 45% return to investors for two years in a row.
On the other hand, in the first two months of 2008, the commodity index at the Multi Commodity Exchange (MCX) has risen about 20%. MCX’s spot metals index has risen about 25%, energy index almost 17% and agriculture index nearly 12%.
Sceptical: MCX’s Joseph Massey is not convinced that there is a shift from the equities market.
National Commodity and Derivatives Exchange Ltd’s (NCDEX) future agri index has gained close to 20% and the agri spot index about 15% in the same period.
Indian commodity exchanges are future exchanges and spot indices are based on polled prices in the physical markets of respective commodities.
Commodities, such as gold, silver, sugar, crude oil and some metals, have been seeing a continued upswing in recent times on higher demand and strong global cues.
“The volatility in the commodities’ markets in recent times is definitely driving some traders to shift from the stock markets to trading in commodities. They are seeing this as an opportunity to make money even as equities markets are facing a correction,” says Madan Sabnavis, chief economist at NCDEX.
Adds Shailendra Kumar, head of research, Sharekhan Commodities Pvt Ltd, “Since the beginning of this year, many of the commodities’ indices have outperformed the equity indices and this has led to a shift to commodities trading from equities trading.”
According to Kumar, a similar trend was seen in the ’70s when oil prices were rising, triggering higher inflation. “At that time too, commodities were outperforming the stock markets globally and many stock traders were shifting to the commodities trading ring,” Kumar says.
Giving credence to Kumar’s theory, the volume of trade in MCX and NCDEX has also consistently been rising. For instance, trading volume at MCX rose close to Rs7,000 crore and that of NCDEX to Rs6,100 crore on 7 March, from Rs4,600 crore and Rs3,000 crore, respectively, in early January.
The average daily trading volume of equities in the cash market, on the other hand, is slipping. For instance, daily trading volume of the National Stock Exchange has come down from around Rs20,000 crore in early January to Rs12,500 crore now. On BSE, the drop in the same period is from about Rs10,000 crore to Rs5,600 crore.
According to the data available on the website of the ministry of consumer affairs, food and public distribution, the total value of trading at the commodity exchanges between 1 and 15 February has risen more than 50% to Rs6.69 trillion from Rs4.45 trillion in the year-ago period.
The Eonomic Survey, released before the 2008 Union Budget, also spoke about the rising volume of commodity exchanges. The total volume of trade in the commodity futures market rose to Rs36.54 trillion in 2007 from Rs34.84 trillion in 2006.
Kumar of Sharekhan Commodities expects more and more traders to shift from equities to commodities. “This phenomenon of rising commodities prices is going to continue for at least 15 to 20 years, as that is how long a commodities cycle lasts generally,” he says.
However, not everyone, especially executives at the exchanges, is convinced there is a shift.
“While the commodities market turnover has improved partly during the recent period, it is largely due to weakening of dollar, rise in global bullion and energy prices and the increase in volatility,” says MCX’s deputy managing director Joseph Massey.
According to him, the surge in volume in Indian commodity exchanges is “in line with global commodity exchanges”. The volume of gold, silver, copper and energy products in NYMEX increased by about 142%, 83%, 74% 23%, respectively in January from December 2007.
Unupom Kausik, head of research, Anagram Comtrade Ltd, a commodities broking firm, also does not see a shift in traders’ perference.
“It would be too soon to come to such a conclusion. There is not sufficient data to prove the shift. If you look at the number of contracts, the increase is quite marginal,” Kausik says. According to him, one should not go by the value and since the prices are rising, the value of contracts is bound to go up.
“It would be incorrect to link the rise in turnover (in commodities market) to fall in Indian (equities) markets. The two markers are distinct with primarily different participants and serving two distinct economic functions. Though the providers of this service (in commodities market) may have some commodities brokers and some securities brokers, the larger set of users of this market are still commodities’ market participants,” says Massey of MCX.
Sabnavis of NCDEX too attributes the rise in prices of commodities such as oil and metals to a global phenomenon. He says prices of agricultural commodities may go up as the rabi harvest is not expected to be good this year and this will make the supply of agricultural commodities “sub optimal”.
“The current upswing in commodities worldwide is more of a factor of demand from China and India, rather than demand from the West. We expect China and India to continue to grow at the current rates for the next four to five years. So, the commodities prices should remain firm till 2015,” he says.
P.H. Ravikumar, managing director and CEO of NCDEX, recommends three things to make commodities trade popular in India—ease of access, cost of access and availability of data. “It is just that not many people are aware of commodities as a tradable concept, but gains in commodities can be higher than stock markets, while the risk is much lower,” he says.
“The commodity markets in India are still in the nascent stage. The market requires participation from banks, mutual funds and FIIs to attract all physical market corporate,” says Massey. He expects the commodities market to become more popular as new products and participants are added.