Commodities lose more than equities globally
While the recent downward spiral in assets such as equities and commodities started around the end of July, globally the fall has been much sharper in the latter. In the five months since the US rating downgrade, commodities have lost 11.27 per cent (on the all commodity index of S&P GSCI).
The metals index was the worst performer, losing 23.4 per cent, while agri commodities lost 16.8 per cent globally. In comparison, major equity indices such as the Dow and FTSE lost only 5.6 and eight per cent, respectively. The Brazil equity market was down just over five per cent and Mexico two per cent up. The Hang Seng was down 17 per cent in the aforesaid period, reflecting concerns in China. The rise in the dollar has changed many equations.
Globally, funds’ investment portfolios have around 15 per cent share of commodities while the equities base is nearly 30 per cent.
In equities, investors make money by taking long positions and long-only funds don’t sell in wholesale when problems are short- to medium-term in nature. That has happened.
| ASSET PERFORMANCE SINCE US RATING CUT | |||
| 20-Jul | 19-Dec | % chg | |
| Commodity indices | |||
| S&P GSCI Ind Metal Spot | 476.64 | 364.91 | -23.44 |
| S&P GSCI Agric Indx Spot | 483.38 | 401.97 | -16.84 |
| S&P GSCI Index Spot Indx | 696.40 | 617.90 | -11.27 |
| MCX Spot Metals | 4640.75 | 4647.81 | 0.15 |
| NCDEX Dhanya | 1237.42 | 1418.41 | 14.63 |
| Equity indices | |||
| Hang Seng | 22003.69 | 18070.21 | -17.88 |
| Sensex | 18502.38 | 15379.34 | -16.88 |
| FTSE 100 (IST 1830 Hrs) | 5853.82 | 5383.02 | -8.04 |
| Dow Jones (Dec 16) | 12571.91 | 11866.39 | -5.61 |
| Brazil BOVESPA (Dec 16) | 59119.71 | 56096.93 | -5.11 |
| Mexico IPC (Dec 16) | 35341.67 | 36054.63 | 2.02 |
| Currency | |||
| US $/Rupee | 44.46 | 52.89 | -18.96 |
| Dollar index (IST 1830 Hrs) | 74.79 | 80.30 | 7.36 |
| Compiled by BS Research Bureau Source: Bloomberg | |||
“In commodities, positions include both sides. There is less physical investment and more positions are created in derivative products. In times of uncertainty, funds reduce commodities positions first and, hence, they fall first,” said T Gnanasekar, Director, Comm Trendz Research & Fund Management.
There were some fundamental reasons for the fall in commodities. When the US was downgraded, the dollar index started going up, mostly due to weakness in currencies.
“When the dollar strengthens, commodity prices generally fall because non-American countries’ currencies come under pressure and their demand is affected,” said Jayant Manglik, President, Retail Distribution, Religare Securities.
Apart from issues in the euro zone, another major concern that ruled commodities was of a hard landing in China, which has not subsided yet. According to Sudakshina Unnikrishnan, vice -president, Commodities Research, Barclays Capital, “Fears over the euro zone debt crisis, concerns over a hard landing in China and risk aversion have been weighing on commodity prices recently. While the focus is on Europe, in our view a Chinese hard landing is the biggest threat to commodity markets in 2012.”
The Indian scene is different. In India, metal prices are flat due to high import costs on a weaker rupee. The equity market has lost about 15 per cent due to domestic factors in addition to global issues.
“For metals and bullion, India tracks global prices and as the rupee fell the prices of these commodities also fell,” said Manglik. India’s metal prices, as reflected in the MCX spot price metal index, are almost flat. Prices have not shown a fall due to rupee depreciation of 19.09 per cent during the period.
Agricultural commodity prices, according to the NCDEX Dhanya Index, are up 14.6 per cent, mostly due to high prices of black pepper, guarseed, rapeseed and chana. The index doesn’t have higher weights for commodities that are consumed most. Prices of most major commodities such as wheat (down 5.5 per cent) and rice have remained subdued due to higher production.
“Better agricultural performance is keeping the prices of major commodities under control,” he said. Sugar prices have gone up recently after permission for exports.
The India, Hong Kong and Japan markets have remained lower. “The Indian market remained low because of shrinking growth and governance issues,” said Motilal Oswal, CMD of Motilal Oswal Financial Services.
The Hong Kong market has reflected concerns over China and emerging markets in general.
Most analysts have a pessimistic outlook for Indian equities while the prices of metals will depend on how the rupee and global prices move. According to Barclays’ Unnikrishnan, “We don’t see much downside for commodities as compared with 2008, when commodities kept rising even as global growth began to slow sharply. This time around, commodity markets appear to have adjusted much earlier to potential risks. We are positive about the price prospects for the next quarter and don’t advise going short on commodities as the fundamentals are supportive.”
Her logic is the recessionary impact, if at all, will be less severe than in 2008, when retailers and manufacturers magnified the overall extent of the demand fall by rapidly compressing inventory pipelines.