Global equity markets are witnessing extreme volatility and will continue to do so till the end of the third quarter, after which we shall see stability and upward movement. The one piece of good news is the retail investors’ approach to mutual funds.
Indian mutual fund investors have come of age and are now following a contrarian strategy—they invest during market corrections. More importantly, they have shown patience in the bear run by continuing to stay invested. They have gauged market risks and more and more of them are entering the markets through systematic investment plans. In the first quarter of 2008, when the markets had receded by more than 25%, as many as 4.5 lakh SIPs were added, bringing the total number to 29 lakh. The popularity of SIPs can be further gauged by the fact that they have a year-on-year growth of 42%.
While 2007 was the year of global funds and natural resources themes, 2008-9 will be the year of consumptiondriven emerging markets and commodity funds. Globally, countries are witnessing a rise in their domestic consumption patterns, leading to an increase in demand for products like food grains, energy and steel. Developing countries like India, China, Brazil and other emerging markets are driving this growth. This has led to the opening up of an investment opportunity in commodity stocks.
Moreover, commodities work on a base principle of demand and supply. Currently, the demand in emerging markets is soaring, whereas there is a supply constraint. For instance, the consumption of oil has increased by a whopping 15,378,000 barrels per day in the past 12 years, whereas its production lags by 200,000 barrels per day. Brazil’s domestic consumption of soyabean is expected to increase by 12.3 million tonne during 2008-9. Worldwide, the demand for gold among retail investors has increased from 165 tonne in 2000 to 403 tonne in 2007, while in the past seven years, no major gold producer or miner has discovered any new large-scale gold deposits.*
Commodities tend to react differently from traditional financial assets to the changing economic fundamentals. They are one of the few asset classes that tend to benefit from rising inflation. As demand for goods and services increases, their prices too usually rise, as do the prices of the commodities used to produce those goods and services. Since commodity prices usually rise when inflation is accelerating, investing in commodities may provide portfolios with a hedge against inflation. It’s no surprise that in the current scenario, when most of the equity markets across the globe are in an early recession, the RICI index has managed to outperform most of them; on a year-to-date basis, the RICI is positive by 20%#.
At this juncture, it seems appropriate that an exposure to commodities and emerging markets will boost one’s portfolio—while the Sensex has lost about 38% since January, the RICI has gained over 25% in the same period.
(*Source: BP statistics, USDA, World Gold Council; #Source: Bloomberg)
Arindam Ghosh, CEO, Mirae Asset Global Investment Management (India) Pvt Ltd