Emergence of Commodities as an investment class

1. Emergence of Commodities as an investment class Prof. Deepak Ukidave Associate Dean – ICFAI Business School, Mumbai National Workshop on Commodity Research - NCDEX

2. “If stocks, bonds and commodities were part of the same family, commodities would be the sibling who never measured up, the black sheep – the brother-in-law, perhaps, who got wiped out in soybeans. Commodities have never got the respect that they deserve, and it’s been something of a mystery to me why.” - Jim Rogers, Commodity Investment Expert & Creator of Rogers International Commodities Index. National Workshop on Commodity Research - NCDEX

3. 2004 Study Results Study titled “Facts and Fantasies About Commodity Futures” carried out by Yale School of Management’s Centre for International Finance published the following results: • Since 1959, commodity futures have produced better annual returns than stocks and outperformed bonds even more. Commodities have had lesser risk than stocks and bonds, as well as better returns. • During the 1970s, commodity futures outperformed stocks; during the 1980s the exact opposite was true – evidence of the “negative correlation” between stocks and commodities that is often noticed. Bull markets in commodities are accompanied by bear markets in stocks, and vice versa. Continued - National Workshop on Commodity Research - NCDEX

4. 2004 Study Results • The volatility of the returns of commodity futures they expected for a 43 – year period was slightly below the volatility of the S&P 500 for the same period. • While investing in commodity is one rational way to play a commodity bull market, it is not necessarily the best. The returns of commodity futures examined in the study were “triple” the returns for stocks in companies that produced those commodities. National Workshop on Commodity Research - NCDEX

5. Commodities as an alternative investment class in 21st century Viable alternative to equity, real estate and other traditional forms of investments owing to – • Better returns • Less risky • Less price volatility due to few factors influencing commodity prices • Less sluggish than bonds • Good way to diversify a portfolio of stock & bonds Continued - National Workshop on Commodity Research - NCDEX

6. Commodities as an alternative investment class in 21st century “Twentieth century was witness to three long commodity bulls (1906-1923, 1933-1953, 1968-1982), each lasting an average of seventeen years and we are living in the middle of another such bull period which started in 1999. By nature, commodity bull markets last for a longer period than stock market bull periods. This presents all the more reason to be excited about the real things” - Jim Rogers (Hot Commodities). National Workshop on Commodity Research - NCDEX

7. Commodity Market Beneficiaries • Farmers/Producers; • Processors; • Traders; • Manufacturers; • Wholesalers; • Retailers and end-users. All these participants in the commodities trade are benefited to a large extent due to changes in technology, communication networks and a number of value-added services provided by multi-commodity exchanges. National Workshop on Commodity Research - NCDEX

8. Research Framework Research Question • Have commodities emerged as an alternative investment class ? Hypothesis Testing & Research Methodology • Macro economic analysis of demand, supply, price movements of certain select commodities traded on the exchange. For example, gold which has hit 28 year high spot price in European trade, subsequent to rupee strengthening against the dollar in last 6 months. Continued - National Workshop on Commodity Research - NCDEX

9. Research Framework • Study of hedging strategy in commodity futures used for effective risk management in select commodities like gold, ferrous and non-ferrous metals. • Comparison of price volatility of various commodities traded on commodity exchange platforms for a period of three years. • Study of recent trends in the commodity markets, including real challenges faced by the investors while investing in the world’s best market profitably . • To identify critical dynamic issues / intricacies which need to be addressed to ensure further thrust and efficiency of commodity markets. National Workshop on Commodity Research - NCDEX

10. Commodity Future – Increasing Farmer Participation • In India, 60% of the population dependent upon agriculture. • Farmers are now assured better price for their produce (fair price discovery). Hence, they are no longer required to sell below cost of production in distress. • Market determined price information available to the farmers enabling them to plan their production schedule. • Inculcates competitive spirit among farmers to cultivate quality produce and among the traders for quality production and output. National Workshop on Commodity Research - NCDEX

11. Commodities Futures Market – Other Benefits • Price risk management through hedging strategy, wherein, price risk that is inherent in a spot market is offset by taking an equal but opposite position in futures market. • Enable the exporters to hedge their price risks (risk arising from volatility in foreign exchange rate movements) and improve competitiveness. In fact, with rupee strengthening against the dollar, export firms can now go in for more proactive hedging strategies, such as entering into forward and option contracts or exotic derivative products. • Enables manufacturers to predict domestic prices that are likely to prevail in future, so that they can ensure that their market share is protected even with free entry of imports. • Hedging would cut down the discount rate in commodity lending thereby enabling commodity traders to get easy access to credit. National Workshop on Commodity Research - NCDEX

12. Future of Commodity Markets • National online exchanges started operating since 2003. • Future trading in commodities permitted from 2003 & thereafter remarkable growth in volumes traded in the commodity market. • Just passed nascent stages of their growth story. • Phenomenal turnover achieved by commodity derivative exchanges in India. • Increase in volume by more than 25% to Rs.27.39 lakh crores for 2006-2007 period within just four years. • Investor community in India has finally started taking notice of commodity markets. • Bright future ahead – emerging as a new hot market for the future. National Workshop on Commodity Research - NCDEX