Most of us know that India is one of the biggest global consumers of gold and silver, and major Indian festivals such as Diwali can cause spikes in their price, with up to 15% of total consumption from the retail sector in the form of coins and bars. India is also a large producer and consumer of a range of other agricultural, energy and metal commodities.
As this market opens up to investors, Thomson Reuters and the Multi Commodity Exchange launched a new index series on 26th September to allow investors to better track these markets.
In this market, where so many people buy and hold physical precious metal assets, and trade a range of other commodities, it has largely been closed to the Indian asset management industry. Retail and institutional investors are able to invest only in equities or bonds.
This is now changing. The regulator, SEBI, is slowly allowing market participants to invest in commodity derivatives.
This is an important step because, without commodity derivatives such as futures, an investor would need physically to hold large amounts of metals, oil or agricultural products, which is impractical, costly, and could lack transparent pricing.
What is allowed?
Initially, “AIFs” or Alternative Investment Funds are permitted to invest, but only the “Category III” variety which is Indian hedge funds. The next stage of approvals will be Indian Mutual funds and foreign investors, which will truly open up the asset class to the buy-side.
Once approved, it will be possible to either invest in exchange-listed commodity futures, or derivatives of indices which track the performance of individual or baskets of commodities.
How is Thomson Reuters getting involved?
Thomson Reuters has teamed-up with MCX, the biggest commodity exchange in India, to offer a new series of indices which track the performance of 11 MCX commodity futures.
Thomson Reuters is already a provider of a major global commodity index which is also the world’s oldest, the Thomson Reuters/CC CRB index, originally launched in the 1950s and which now has over $1.5Bn in assets tracking it.
The newly launched Thomson Reuters-MCX India Commodity Indices (iCOMDEX) use a similar methodology to the CRB and other global commodity indices, but unlike those focusing on US- and UK-traded commodities, focus on the most traded and relevant commodities in India.
The indices will benefit investors in the following ways:
- As a reference for measuring fund performance
As with any other asset class, investors need to measure performance and report it to their clients. The indices can be used by investors to measure the performance of any Indian commodity investments to see if they’ve outperformed or under-performed the benchmark.
- For long-term research or real time market monitoring
The indices have data from 2012, so are a reference point for investors looking at longer term historical and ongoing trends.
Similarly, traders, analysts or even media organizations wanting to view short-term price movements due to certain economic/political events in the overall Indian commodity market, or sectors such as metals, energy or agriculture, can use this index series to do so (the indices are calculated in real-time).
- Development of exchange listed trading products
Once approved by the regulator, SEBI, MCX will apply to launch futures based on the new indices.
This will allow market participants to either hedge or speculate not only on individual commodities (which they can already do directly via MCX futures) but also on indices based on baskets of commodities.
Options may also be permitted at a future date to give more ways to manage risk.
- Development of passive investment products e.g. ETFs (Exchange Traded Funds) and index funds
This is the fastest-growing segment within the buy-side, due to the cost efficiency and transparency of funds based on indices. In India, gold ETFs are the most popular type of ETF, but each one requires the asset manager to hold physical gold.
The new indices will allow for asset managers to build products that replicate their performance. This could be the overall composite India index, sector indices such as Bullion or Energy, or individual commodity indices which are also available. The asset managers can then trade the MCX-listed futures to manage the ETF synthetically, rather than having to hold and store each commodity in the correct weight.
What is the benefit of investing in commodities?
Opening up commodity markets to Indian investors allows them to broaden their investment options.
The overall performance of commodities is driven by different factors to stocks and bonds meaning the performance of such indices can look quite different.
This allows investors to diversify their portfolios. Looking again at India and the commodities included in our TR-MCX indices, there are a number of different commodities driven by different factors: gold and silver are considered as “insurance” in bear markets; oil is driven by OPEC; and industrial metals are driven more by construction.
This means that investors can get long-term, diversified exposure to a range of commodities, or invest in and out of certain sectors or individual commodities based on more granular, short-term factors.
Separately, there are a number of analysts predicting a commodity market boom. Current prices are at an almost all-time low, demand is being understated and supply overestimated.