With rising quantum of stimulus in developed economies, the demand in the global commodities market is poised to take off, while the stringent supply conditions are adding to the price rise, observe commodity analysts. A gamut of key factors such as US dollar volatility, vaccination drive for Covid-19,global market capitalisation, geo-political situations among the US, China, India, Iran, fiscal stimulus, second strain of virus, recovery of global trade and manufacturing sector would drive the global commodity market this year, says SMC Global Securities in its latest 'Global Commodity Outlook-2021' report.
Further, the vaccine optimism is expected to boost the commodity demand. It's estimated that about 30 crore people would get vaccinated in 2021 year and over a billion across the world. This would pave the way for global trade and enhance manufacturing activity boosting the demand for energy, base metals and so on. However, geo-political concerns may impact the global commodity market from time to time as US-China trade war. Cross-border tensions among India-China, political situations in Iran and Middle East region would influence the price fluctuations in the global commodity market.
Dr DK Aggarwal, MD, SMC Investments and Advisors Ltd, elaborates that "the year 2020, was really bumpy for the entire world and commodities were not an exception. Some counters viz. bullion, base metals, oil seeds, etc., speedily bounced back from dents caused by the pandemic, while others have taken more time to rediscover their ‘normal’, especially crude and some agri commodities. But one thing is for sure that during this pandemic, commodities came back in fashion and grabbed the attention of entire world. Factors such as massive stimulus, zero interest rate policies, Chinese demand and reopening of economies stimulated the V-shaped recovery in major economies. Financial markets too gained on this recovery and showed a good comeback."
The global bullion played crucial role in saving portfolio in the most volatile time during Covid-19 as it gave over 30 per cent returns in 2020.
Ajay Garg, CEO, SMC Global Securities Ltd, says: "It was in huge demand that’s why we have seen record inflows in ETFs. With low interest rate policies amid huge stimulus by world, ultra lose money will remain in the system. It will keep gold in high demand on fear of inflation. So, keep investing in bullion, as the world is still not out of danger from Covid-19 and it will work as Insurance for the Portfolio.
Subhranil Dey, senior research analyst (agri commodities) at SMC Global Securities Ltd, adds: "Sturdy agro commodities with friendly market reforms, Indian agriculture sector is all set to see major positive changes after major farm reform bills. It is going to make this sector more transparent, competitive and farmer’s friendly. The government has undertaken landmark agricultural reforms, freeing farmers from restrictions on sale of their produce and ending the monopoly of traders. Even in stimulus in 2020, agriculture got a decent allocation of funds. There have been some new launches in Indian commodity exchanges such as gur and rubber, which shall attract more volumes. Export commodities like guar, castor, some spices, cotton, menthal are still in pressure as international trade is yet to open in full scale. As soon as the gates open, these commodities may prove dark horses and give good returns."
The Commodity Outlook-2021 report further stated that the year 2020 was all about Covid-19 and how to stay immune from it in terms of both health wise and money wise. The virus had put half of global population under some form of lockdown during the spring of 2020. This was a truly global crisis as no country was spared from its deadly effect. For the first time, since the Great Depression the advanced as well as developing economies and emerging markets were in recession. Several economies entered this crisis in a vulnerable state with sluggish growth and high debt levels. With the situation aggravating to pandemic, the financial markets gave sharp correction and touched multi year lows. Almost all exchanges around the world gave knee jerk reaction. From January 17 to March 20, the Ibovespa index in dollars depreciated 52 per cent, the second worst performance was Indonesia, with a drop of almost 50 per cent. South Africa and Russia followed, with a drop of around 45 per cent. Chile has the fifth-worst performance, falling just over 40 per cent in the period. The United States and Europe have one of the smallest declines, with 30 per cent devaluation each.
Lower Interest Rates
It's not quite as bad as the Great Depression in the 1930s, where the output drop was sustained over a three to four-year period, and the unemployment rate went up to 25 per cent in the US. It was the phase, when half of the population was under lockdown. To get rid of this recession the entire world came together and gave more than $12 trillion to revive the economy. Most of the central banks opted for frequent interest rate cut to revive the economy. In general, the stock market rises when interest rates move lower, because looser money means more consumer spending and business investment. Change in fiscal and monetary policies gave much needed support to the economy. And the economic indicators like PMI, trade data’s, Employment, inventory levels, crude consumption etc started to give green signals. Though, this time it was not only fiscal and monetary policies amid stimulus which helped the recovery, it was also the continuous effort of the entire world to bring the Covid vaccines as soon as possible for the world. In second half of the year, with its progress of Vaccine to Vaccination amid recovery in economy, market touched new highs.
Consistent with global efforts to stem the economic fallout from the virus outbreak. The Dow Jones Industrial Average (DJIA) index dropped around 8,000 points in the four weeks from February 12 to March 11, 2020 but has since recovered to 30,199 points as of December 14, 2020. The Nasdaq Composite index fell by approximately 2,400 points in the four weeks from February 12 to March 11, 2020 but has since recovered to 12,595 points as of December 14, 2020. The month of December was one among the strongest months of the year for stocks. The US stock market averages are on pace to finish 2020 at record highs. China’s stock market soared to a record high of more than $10tn as the world’s second-largest economy continues a rapid bounce back from the coronavirus pandemic. The economy expanded by 4.9 per cent year-on-year in the third quarter with industrial growth driving the recovery. Growth rapidly recovered in the three months to the end of June after the relaxation of lockdown measures. China is likely to be the sole major economy to register positive growth in 2020. Nevertheless, Hang Seng, FTSE and Strati Times gave negative return in 2020 despite all efforts. Apart from Covid-19, it was also tension between China and Hong Kong which restricted recovery, especially after China passed a hugely controversial national security law for the Asian financial hub. Along with equity, commodities also recovered and base metals saw buying with improvement in economy, especially in China which contributes about 50 per cent in most of the base metals trade.
Copper which is known as PhD in Economics appreciated more than 27 per cent. Dollar index, better known as DXY, is a quick measure of the value of the USD against a weighted basket of currencies of US trade partners, fell more than by nine per cent on Covid and zero interest rate policies amid massive stimulus. Countries reliant on tourism, travel, hospitality, and entertainment for their growth are experiencing particularly large disruptions whereas other countries have recovered a lot and recession was comparatively shorter for them. Gold gave the Golden Opportunity and gave return of more than 30 per cent in 2020. It made new highs in many currencies. Indian gold saw more premium on depreciation in INR of more than 3%. Silver outperformed Gold. Crude oil saw negative pricing first time in history on supply glut, recovered in second half, nevertheless it still gave negative return of more than 22%. The other commodities of energy counter natural gas gave positive return of 23%. Despite recovery in may counters, CRB saw negative return of more than 10% on fall in crude counter. Recent developments of several Covid-19 vaccines raised hopes for a faster pace of relaxation of social distancing measures and travel restrictions around the globe, it reflected in financial market too and buying emerged everywhere. US President Donald Trump signed into law a $2.3 trillion pandemic aid and spending package he had until now refused to sign. It is stimulated buying in bullion and other commodities. It was the year of both “Pain and Gain”.
Aggarwal further said: "The process from developing vaccines to providing vaccination there are plenty of risks hanging over the economy and markets. Mining are also suffering from production loss as they are not working on full capacity. It is somehow balancing the demand and supply equilibrium. Moving ahead, economy should open gradually and we are hoping that the second half of 2021 will bring more cheers to the world amid breaking through vaccination boundaries commodity businesses should catch pace and we can expect pre Covid era activities.
With a weaker dollar, inflation and additional monetary and fiscal stimulus commodities market is ready for a potential rally in 2021. The most powerful counters – energy, is yet to get the proper signal from economic recovery as international travel and trading activities are not in full swings. Even tourism is on back foot. Oil has recovered in 2020 to $50 from negative pricing (first time in history). The unprecedented fall in oil demand earlier last year, left the market drowning in supply, the OPEC+ members put aside their differences and agreed historic production cuts. The deal agreed further easing from January 2021, but that has now been revisited to avoid a return to surplus at the beginning of 2021. We can expect a comparatively “better balanced market” for crude. Worst is behind us if we talk about natural gas, gradually it should take-up the rally.
Hedge Against Inflation
Bullion must be the part of portfolio as world is still not out of woods and Zero Interest-Rate Policy (ZIRP) amid huge stimulus will continue to raise the inflation fear and gold is a very good tool for Hedge against Inflation, suggest analysts at SMC Global Securities in the report. Additionally, the incorporation of gold into a portfolio can assist in spreading overall risk and shelter investors from equity pullbacks during times of uncertainty. It has given more than 30 per cent in 2020 and can touch the higher side of 2050-2075 in 2021.
Aggarwal observes that "China was the main driving force for recovery in base metals in 2020. But in 2021, we are hoping that entire world will contribute in the expected further upside in this counter, which will show the actual economic performance. Improving GDP, PMI, trade data etc amid lower production are supporting the rally in the present scenario. The manufacturing PMI in a number of countries shows that factories are expanding capacity on a greater number of new orders. If we talk about agri commodities, they saw a modest fall in the prices when the entire asset classes were facing sharp downside due to its indirect association with economic activities demand being inelastic in nature. It saw temporary shock, however recovered quickly."
Dey further adds: "Agricultural imports have enjoyed a strong year in 2020, also buoyed by Chinese purchases and distribution through PDS. Indian agri sector is all set to see major positive changes after major farm reform bills. It is going to make this sector more transparent, competitive and farmer’s friendly. The government has undertaken landmark agricultural reforms, freeing farmers from restrictions on sale of their produce and ending the monopoly of traders. Even in stimulus in 2020, agri sector received the major allocation. Transportation, labor and weather issues amid higher consumption are keeping agri commodities on higher side, even in international market. There are some new launches are there in Indian commodity exchanges such as gur and rubber, which may attract more volume."
Back at home, Indian commodities exchanges are going through a sea change along with massive reforms in Indian economy, which is expected to bring huge volumes in this market. With Agri Reform Bills, huge stimulus, Vocal for Local, low interest rate, etc., are all set to give economy a new highs. Even Indian commodities exchanges are not behind and they have come with innovative products with world class mechanism. It is proper time to diversify the portfolio in commodities as equity has seen a good rally and continue to see the buying momentum, but may be at slower pace and commodities market will follow the equities rally in this year.
For proper diversification in the portfolio, one must invest a part of it in commodities to get the benefit of the economic cycle.
One should try to trade in liquid contracts like bullions, metals, energy, oil seeds, spices, guar etc. One can enjoy trading in indices like iComdex bullion, Agridex and Metal index, which are cash settled. Now Indian commodities exchanges are equipped with option also in which margins requirements are lesser as compared to futures. The investors should take research based advised positions in options to enjoy the better risk-reward ratio. Many Farmers and producers organizations (FPOs), physical traders, producers etc are considering this option in goods to hedge their positions in exchanges.
Garg says: "Last year, was an exceptional roller coaster rise for all the financial markets and it shall continue to be so in 2021, but may be less bumpy. In the year gone by, extreme volatility was the only phenomenon that we witnessed amid the invasion of an unknown virus Covid-19, that brought to the world one of the highest spread pandemic, including grief’s and sorrows. One may never want to recall 2020, but should keep in mind that crisis can hit life anywhere and financial markets anytime. It’s a kind of lesson that the past year has taught us to be always ready to deal with our finances in the best possible way. The theme of this article is on the same line as to which are the themes or factors that an investor should keep a watch and track in 2021, so as to minimize the risk and maximize the wealth, when invested in commodities market. So, an investor should keep a sticky note of these top market-driving themes before heading into the ocean of commodities."
The writer is a business journalist with 27 years of experience