You Can Also Make Money In Commodities

Think investment, think stocks. And fairly so, for over the past 10 years, the BSE Sensex has given an average return of around 17 per cent per annum, some 10 per cent more than the average yield on treasury bills.

Investor memory is very short, whether on Dalal Street or the Wall Street. The Harshad Mehtas and Ketan Parekhs are forgotten the moment the next bull run is in view.

Those who enter the market at the beginning of the bull run, make money; those who enter late, mostly due to the herd mentality, end up losing. More often than not, small retail investors get hurt the most.

The first principle of investment is to buy cheap. We understand that “cheap” is a relative term. In a bull run on the stock markets, investors get carried away and fail to realise that after a certain time, the share prices of most companies no longer reflect the true economic value of the company.

This is what, we fear, might happen in the Indian stock markets in the near future. We have come across numerous articles in the business magazines and newspapers, lauding the performance of the Sensex and wondering if the Sensex will touch 25,000, 30,000 or even 50,000.

Doesn’t it sound familiar? Hadn’t we read similar euphoric articles in the US media during the late 1990s? There was also the ill-fated Dow at 36,000 by James Glassman and Kevin Hassett, whose calculations were based not only on grossly illogical assumptions, but also failed to see the coming storm of the dot.com bubble.

While all this was happening, there was one man who kept reminding everyone about the one market, which everyone treats like a prodigal child. We are talking about Jim Rogers, the best selling author of Adventure Capitalists and Hot Commodities, and the commodities market.

During the late 1990s, he not only advised all those who would care to listen that the bull phase in commodities market was about to begin, but also invested heavily in commodities himself. Of course, people called him crazy. Proving them all wrong, he escaped the dot.com bubble and also made tons of money in the commodities market.

We see the same phenomenon being repeated in the Indian markets. The stock markets are breaking all records and with it, the appetite of the companies to grow.

This will result in huge demand for all commodities, especially those used heavily in infrastructure development. This will result in a demand-supply imbalance, driving up the cost of raw materials for the companies. As the costs of raw materials rise, the bottomline would start dwindling, awakening the bears from their slumber.

We are not implying that the stock markets are going to crash in the near future. The economy is doing well and along with it, the stock markets will continue to do well.

However, what we are implying is that, there is an alternative investment opportunity, which is being overlooked by most, especially the retail investors. Historically, volatility of most commodities has been lower than that of equities.

India is one of the largest producers, consumers and exporters or importers of commodities in the world. You would invariably find India’s name in the top 10 list in any of the above category. The country has the potential to become the global hub for commodities trading.

Commodities, as raw materials, are subject to price risk. They form anywhere between 40 per cent (in transport industry) and 90 per cent (in textiles and automobile industry) of the turnover of companies. Commodity derivatives provide the scope to do away with this price risk.

The investment by the government in infrastructure in the next 5 years is expected to be about $1.5 trillion. This would have a cascading impact on both the markets. The demand for steel, copper and other metals is going to go up substantially.

The world over, the food processing industry is $90 billion. We expect some sourcing to take place in the near future from India on the same lines as we have the IT, ITES and BPO.

In the long run, this would increase substantially and this industry may find a new name called FPO (you guessed it right, food processing outsourcing).

The other thing worth noting here is that we have 51 per cent land, which is cultivable as compared with a world average of 11 per cent. Of the 15 seasons required for diverse cultivation, India has 11 seasons available. It is only matter of time that the Industry is realises the opportunity available in agriculture. Already, there have been signs of such activity by Reliance, Bharti, HLL and ITC, etc.

As investors start to realise the potential of the commodities markets, the prices will start moving northwards. In fact, they have already started. The turnover in Multi Commodity Exchange of India Ltd and National Commodity and Derivatives Exchange Ltd are already soaring.

The opportunity in the commodities market is very visible and here to stay. It is time investors take note of this market and realised the possibility of making good money by investing in commodities.

The current bull run in the stock markets is going to end soon, though how soon remains a question. We would rather predict the result of the ongoing India-Pakistan test series.