The outlook might be quite bleak for commodities with slower global growth, but Gopal Agrawal, CIO, Mirae Assets Global Investments India, thinks that companies with strong balance sheets and pricing power can be good investments
Will the end of cheap money, if the Fed starts hiking rates, make commodity prices fall further?
Commodity prices are a function of demand and supply. All major agencies like OECD and IMF have cut the global growth projection. During 2003-08, world growth was around 5 per cent; it is between 3 and 3.5 per cent now.
This is resulting in a sharp fall in commodity prices. Oil has fallen mainly due to excess supply while metals have fallen due to slower demand and falling cost of production.
Currencies are a function of growth, fiscal and current account deficits, which have deteriorated in all commodity producing countries due to lower global growth. We are sticking with companies that have strong balance sheet, cost leadership and those which can deliver volume growth.
Does China moving its reference rate lower impact commodity market?
You have to understand that the decline in yuan value is insignificant when viewed against the backdrop of how strong it has been in the past. In 1994, when China moved its currency from 5.7 to 8.7 against the dollar, it continued to grow. In December 2001, when China entered the WTO, the yuan was at 6.7, today it is at 6.36. Yuan is the only currency that has appreciated against the US dollar. If you consider these factors, the depreciation so far is miniscule.
Will the market fall in China affect consumption too? What about consumption in India?
First of all, market in China is still up 34 per cent on one-year basis; second, equity participation by retail investors is sub-10 per cent in China so it will not have any material impact on consumption in the country. The authorities are rebalancing the economy to boost consumption.
The consumption in India is a multi-year theme with urbanisation and income level rising, it will increase multi-fold over time. There can, however, be some moderation in the long-term uptrend.
What do you think will be the triggers that can make this global down-cycle in commodities reverse?
The ambitious programmes of the Chinese Government, such as the One Belt One Road (OBOR) initiative — that intends to improve transport links to promote growth in underdeveloped regions of Central and Western China — are expected to result in improved commodity demand. As the Indian Government too spends more on infrastructure, that too could help push commodity prices higher.
Is it time to start looking at commodity stocks now?
Investors should start buying now. Look at oil , now at $45, I don’t know how many producers can survive at this price.
If prices remain here for six months, the next bounce will be really strong. At this price, no country, including West Asia, will be able to meet their cost and will therefore face a deficit.
The risk-reward is favourable for commodities now. Commodity prices have not worsened too much from the start of this year. There can be a time correction, but it might not be a significant price correction from here.