During recession times, consumption declines and that further leads to a drop in commodity prices. Global oil price West Texas Intermediate (WTI), Oklahoma, in the US fell to sub-zero in last April. Agriculture commodities prices too have declined sharply in the recent past. On the other hand, we have seen how gold dazzled bright in an otherwise gloomy economic mood. In The Finapolis Conversation this week, Kumar Shankar Roy speaks to Aurobinda Prasad Gayan, head (commodities strategy), Tata Asset Management, on the way ahead for commodities. Aurobinda, who has an experience of a decade and a half, talks about the importance of understanding how long a recession will persist and its repercussions, the commodity strategies used in multi-asset fund, valuation process of commodities, commodity and exchange-traded commodity derivatives and much more. Read on to know.
Your AMC had launched a multi-asset fund with direct commodities play sometime back in its early days. How has the journey been so far?
This is a first-of-such-kind; and we are happy to announce that Tata AMC is the first Mutual Fund house in the industry, who has come out with an unique product under Multi-Asset category with inclusion of commodities as an asset class. It has been precisely three months since the fund launch and the participation and experience has been good. This fund has allocations towards equity, debt and commodities derivative products with the benefit of equity taxation. The exclusivity of this fund is the addition of various commodities into the portfolio where other multi-asset funds only have Gold under the commodity asset class. The benefit has been such that within commodity asset class there is clear opportunity of diversification. Within the commodities section, this fund of ours participates not only into gold, but other commodities like silver, industrial metals, energy, and various agriculture commodities traded in Indian commodity exchanges.
I would like to cite some of our strategies under commodities in this fund so that it gives a clear understanding to a retail investor before investing being relatively new kind in the industry. With the current market scenario being very bleak globally and many asset classes are floundering, we have had adequate exposure into safe-haven assets like Gold and Silver. Besides, our participation has been also into some very select metals and agriculture commodities as part of Arbitrage and Calendar spread trade. Overall, the experience has been good, and we expect this is a right product from an asset class diversification point of view and those investors who like to taste a new flavour into their fund portfolio must participate into it.
A few weeks back, we saw global crude oil futures become negative. Is this a one-off or this could happen again? How does a physical commodity become negative in price?
Global oil price West Texas Intermediate (WTI), Oklahoma in the US fell to sub-zero last April 2020. Certainly, the other variety of oil prices had also come down, but not below zero level or negative. That incident was very peculiar, and reasons were many, but the reality was that the NYMEX May Futures contract and correspondingly MCX April Futures contract had settled in negative. We could cite various fundamental reasons to it, but believe it is one of such kind. Although fundamentals of oil are very bearish from the supply point of view, while now the demand is also bleak creating concern for the oil market trend to remain weak. As far as last point of the question is concerned, the storage constraints at Cushing, Okhalama, led to the dumping and unwinding of May contracts with other market participants moving to June contracts perhaps led to negative settlement of the price. However, the question whether oil price can ever be in negative in due course is a very judicious point and that would be determined by the global demand- supply trend.
Gold has been a standout performer for over a year. What is driving gold up? What is your outlook on gold?
I think the sheen on Gold is back since past two years, it has outperformed many other asset classes globally. Gold is said to be a safe appeal asset when others do not perform and believe the current global pandemic is a classic example riding gold price higher. The rise in ETF investors demand, various stimulus packages by government across the globe and investors increasingly using gold to hedge against the unknown impacts of sinking and persistently low long-term interest rates are supporting the gold price trend.
Recent global injection of monies by central banks in reaction to the economic effects of the coronavirus, have only added fuel to this hedge. With the current environment persisting for next few months, there would be an upward pressure on gold prices it is a last resort of investment. The trend of Gold looks positive. However, we need to be cautious and not be ignorant that higher price of gold might fade away heavy physical demand and that could lead to sharp downward price correction in the interim. Overall trend is positive for gold, but one needs to be very particular and thorough before investing into it while long-term investment remains a choice for gold.
Given that the world is slipping into a Covid-triggered recession, historically how do commodities behave in such situations?
It is a very global known fact that during recessionary times, the consumption drop leads to drop in commodity price. I am sure this Covid-19 pandemic too has experienced same for many globally traded commodities. Earlier in the interview, we have discussed about lower crude oil price amid cut in demand. Likewise, many other commodities- hard metals price have plummeted sharply and some of the select agriculture commodities prices too have declined sharply. E.g. Soybean, cotton, and various other edible oils price have dropped over 10 per cent in the recent past. On the other hand, commodity like Gold and to some extent silver performs as haven asset and continues to rise during such recessionary phase.
However, it is very important to understand how long this sort of recession will persist and its repercussion. Typically, recessionary rebounding does not witness V-shape recovery rather it takes adequate time to recover. The revival in the manufacturing sector, improvement in the consumption pattern and other economic activity shall determine the trend thereby the commodities future trend will be calculated accordingly.
Tell us how you do the valuation of commodities. What is the framework that you use to understand whether there is value in a commodity?
Predominantly, valuation of commodities is done through its supply-demand determinants. However, it is observed that supply disruption/shock plays a very important role for the commodity, closure of mines, excessive rainfall, drought, and flood has direct impact on the commodities supply and price. Likewise, demand also plays a very vital role. Factors such as production, stocks, import, export and commodity consumption, are key to study for valuation of commodities.
Commodity & Exchange-Traded Commodity Derivatives are a new concept for MF investors. How would you explain them to a layman and convince them to seek exposure through the MF route?
Yes, it is a very important question. Let me explain it very clearly. Indian commodity derivatives markets are in existence for over 15 years, various commodities are traded under the nationalized exchanges. The participation into this market is always open to retails and institutional clients however, major part is dealt with commodity price risk management through hedging. With the introduction of commodities into Mutual Fund space will not only increase the depth of the market it will also bring more retail investors through Mutual Fund route. Also, this will give benefit to an investor to taste a new asset class which is beyond gold and will help making effective portfolio diversification. Our Multi-Asset Fund will participate only into exchange traded commodity derivatives with various risk-management strategies. This market is regulated by Sebi, depth is adequate, and pricing of commodities are very transparent and robust mechanisms are adhered. Lastly, I would say investing into commodity requires very particular expertise and is difficult for a retail investor to understand everything and invest. With the doors opened now for retailers to participate through Mutual Fund route, I believe it is an excellent opportunity to invest into this fund for better portfolio diversification and enhanced rewards.
Lastly, I would want your opinion with regards to one announcement in Atma Nirbhar package. An amendment has been proposed in Essential Commodities Act for deregulation of sales of agriculture produce. What are the takeaways from this proposal for commodities?
The proposal was to make an amendment in Essential Commodities Act for deregulation of sales of agriculture produce is a welcoming statement. There will be lot of benefit to farmers. The government will amend the Essential Commodities Act to enable better price realisation for farmers. Agriculture foods including cereals, edible oils, oilseeds, pulses, onions and potato, will be deregulated. This basically means that the prices of the essential agricultural produce will now be governed by the market forces. However, government intervention will only be done in emergency situations like a dramatic price hike or any crisis. Overall, it is a very welcoming move and shall be happy to see it coming into effect.