Commodities as an Emerging Investment Class

8/14/2019 Commodities as an Emerging Investment Class

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Team CVS

Chethan Swaroop (08311)Sushant M Mallya (08338)

Vijeth P.R. (08345)

COMMODITIES AS ANEMERGING INVESTMENT CLASS


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1: "Commodity Futures Markets in India: Riding the Growth Phase" by Dr. Alok Kumar Mishr2

Introduction to CommodityMarkets

A commodity futures market is a public marketwhere commodities are contracted forpurchase or sale at an agreed price fordelivery on a specified date.1

This purchase / sale is made through a brokerwho is a member of the commodity exchangeand such transactions are always in the formof standardized contracts

Commodities include agricultural products,

energy products, base metals, preciousmetals, industrial metals, bullion and biofuels.


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Asset as a Class ofInvestmentWhile arriving at whether an asset is a good

class of investment, the following needs tobe considered

Risk of the asset

Returns on the assetLiquidity


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Commodity Demand cycle


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Commodity in a portfolio

Difference between a portfolio with and withoutcommodities.

Data considered are Nifty for Equity, CCIL T-Billindex for bonds and MCX COMDEX for

commodities.Time Period: 5th Oct 2005 to 5th Oct 2009

sset Class xpectedReturn tandardDeviation CorrelationsEquity Bonds Commo dities

( - )Equity Nifty 50 . %16 220 . %23 10 1 .0 278 .0 1855( - )Bonds T Bill Index . %4 4 . %5 47 .0 278 1 .0 3

( - )Commodities MCX COMDEX . %11 9 . %15 00 .0 1855 .0 3 1


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Portfolio with Equity-Bonds

The highlighted row represents the combination with the bestSharpe ratio

Allocations % % Equity Bonds Commodities .xp Ret .t Dev harpeRatio0 1 0 .4 400 .5 470 .0 796

.0 1 .0 9 0 .5 582 .5 991 .0 924

.0 2 .0 8 0 .6 764 .7 193 .0 934

.0 25 .0 75 0 .7 355 .7 960 .0 919

.0 275 .0 725 0 .7 651 .8 372 .0 909

.0 3 .0 7 0 .7 946 .8 800 .0 898

.0 4 .0 6 0 .9 128 .10 631 .0 855

.0 5 .0 5 0 .10 310 .12 588 .0 816

.0 6 .0 4 0 .11 492 .14 620 .0 783

.0 7 .0 3 0 .12 674 .16 701 .0 756

.0 8 .0 2 0 .13 856 .18 814 .0 734

.0 9 .0 1 0 .15 038 .20 949 .0 7161 0 0 .16 220 .23 100 .0 700


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Efficient Frontier with Equity andBonds


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Portfolio with Equity-Commodities

The highlighted row represents the combination with the bestSharpe ratio

Allocations % % Equity Bonds Commodities .xp Ret .t Dev harpeRatio0 0 1 .11 930 .15 000 .0 792.0 1 0 .0 9 .12 359 .14 112 .0 873.0 2 0 .0 8 .12 788 .13 635 .0 935.0 3 0 .0 7 .13 217 .13 611 .0 968

.0 4 0 .0 6 .13 646 .14 044 .0 969

.0 5 0 .0 5 .14 075 .14 893 .0 942

.0 6 0 .0 4 .14 504 .16 092 .0 899

.0 7 0 .0 3 .14 933 .17 570 .0 847

.0 8 0 .0 2 .15 362 .19 263 .0 795

.0 9 0 .0 1 .15 791 .21 120 .0 746

1 0 0 .16 220 .23 100 .0 700


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Efficient Frontier with Equity andcommodities

The data point in black represents the best SharpeRatio.


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-Commodities

Allocations % % Equity Bonds Commodities .xp Ret .tdDev harpeRatio0 1 0 .4 400 .5 470 .0 796

0 .0 9 .0 1 .5 153 .5 560 .0 919

0 .0 8 .0 2 .5 906 .6 002 .0 977

0 .0 7 .0 3 .6 659 .6 727 .0 9830 .0 6 .0 4 .7 412 .7 654 .0 963

0 .0 5 .0 5 .8 165 .8 720 .0 931

0 .0 4 .0 6 .8 918 .9 879 .0 898

0 .0 3 .0 7 .9 671 .11 103 .0 867

0 .0 2 .0 8 .10 424 .12 372 .0 839

0 .0 1 .0 9 .11 177 .13 674 .0 8140 0 1 .11 930 .15 000 .0 792


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Efficient Frontier with Bonds andcommodities

The data point in black represents the best Sharpe.Ratio


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,Efficient Frontier with EquityBonds and commodities

Table for the above graph would be provided with the reportbecause of many combinations of allocations

The data point in black represents the best Sharpe.Ratio


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Commodities: Advantage

Return .DE_C_B . %7 08 . %6 59E_B . %7 08 . %7 60B_C . %7 08 . %7 23


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Inflation Indexed

Correlation between Inflation and CommodityFutures Prices: 0.128

This again is contradicting developed marketswhere commodities are Inflation indexed in

which inflation is factored in the commodityprices.

Inflation indexing is currently not happening inIndia


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Conclusion

Commodities in portfolio would definitelyprovide better Risk-Return combinations.

Commodities have high correlation with Equityin India contradicting diversification

advantage in developed marketsCommodity prices in India are not InflationIndexed.

The reasons might be that the commodity

market, in terms of Volume is not developedin India and hence investors relate it to stockmarket which accounts for the highcorrelation between them.


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Conclusion

Commodities have not yet started offering

goods that they have been offering indeveloped markets and hence would taketime to emerge as an investment class inIndia.

Advantages Commodities

Diversification Yes

Efficient Portfolio No

Inflation Indexation No


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ReferencesBooks / Papers / JournalsCommodity Futures Market in India: Riding

the Growth Phase - A whitepaper by Dr. Alok Kumar Mishra

Websiteswww.nseindia.comwww.mcxindia.com

www.rbi.org.inwww.finmin.nic.in
http://www.nseindia.com/http://www.mcxindia.com/http://www.rbi.org.in/http://www.finmin.nic.in/http://www.finmin.nic.in/http://www.rbi.org.in/http://www.mcxindia.com/http://www.nseindia.com/

Commodities as an Emerging Investment Class

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