Investment specialist Bill Barbour on Indian commodities market
In an interview with Tanvi Varma, Bill Barbour, Investment Specialist,
Deutsche Asset Management, talks about the commodities market in India.
In an interview with Tanvi Varma, Bill Barbour, Investment Specialist, Deutsche Asset Management, talks about the commodities market in India.
Funds focusing on agri business opportunities have done well in the recent past. What are the reasons for this performance and will it continue?
Global agricultural markets have grown steadily since 2001, accelerating in 2007 with prices of food, agricultural commodities and farmland prices, along with related products and services, rising considerably.
Over the long run, the growth in consumption for agricultural commodities will be unstoppable. Global population is soaring and is expected to reach 8 billion by the end of 2020 and possibly 10.5 billion by 2050 (currently 6.9 billion), which means more people have to be fed every year. The rising incomes in the developing world will translate into demand for better food and higher protein consumption.
Of late, we have seen an unprecedented rise in the prices of soft commodities. Cotton, for instance, has gone up by 114% between July 2010 and February 2011, while sugar has risen by 98% and corn by about 66% for the same period. Extended periods of drought in Russia and Ukraine, abundant rainfall in Pakistan and India, and the floods in Australia have resulted in this rise.
Protectionist measures adopted by various countries to control prices have also added to price volatility. However, this increase in prices is not sustainable in the long term.
Should investors choose agri funds at the current market levels?
Although valuations are compelling, the prices of soft commodities could pull back since they have had a huge run up. Upstream companies, those related to the farm, such as seeds, fertilisers and farm equipment, are doing well since farm incomes have gone up. The order books for tractors have gone up by about 20% in Europe last year. Upstream companies have been bid up in value by the share market as people tend to follow the herd. However, value adders, who use soft commodities as material inputs, are facing the brunt as costs are high, margins have become thin and these remain relatively undervalued. Perhaps investors would be better off staggering exposure to such funds.
What opportunities does India provide for investment within the agriculture space?
India provides very limited opportunities within the agriculture sector. There are some opportunities, such as Mahindra & Mahindra-the world's largest producer of tractors. In November last year, the market was trading on the higher side. However, since then, valuations have been looking attractive. India has a small listed agricultural sector, including Jain Irrigation, United Phosphorus (fertiliser company) and some tea and sugar companies. There is also a large dairy industry, Amul being the largest company, but it is a cooperative so we cannot invest in it.
What is your view on gold and silver?
Gold is a good long-term investment. The supplydemand dynamics favour a rise in the price of gold. It is real money, not paper money. The value of gold doesn't erode through paper currency being printed.
Currencies have been devalued against real assets, which is why there is an unprecedented demand for assets such as gemstones, gold, art and property. Over a decade ago, central banks were selling gold.
However, this trend has changed now. Central banks, such as those of Russia and China, are accumulating gold to diversify. In fact, a couple of years ago China allowed its citizens to buy and own gold. All major mining countries, such as Canada, Australia, USA and South Africa, have already exploited their gold reserves. This means that supply is limited and is not going to increase by much. All of these should lead to a steady rise in price but it will be volatile, especially when the quantitative easing exercise ends.
On the other hand silver is not real money. It is an industrial metal and is often seen as a proxy to gold with people trying to derive a relationship with gold. It has no rationale. Its main use was in the photographic industry, which is now defunct. Silver appears to be somewhat overdone.
What about the increase in the price of oil and where is it headed?
Oil prices have gone up because of what is happening in the Middle East. These countries are ridding off autocrats, who have been ripping off the population. Like the fall of the Berlin Wall in 1989, which led to Eastern Europe becoming a true economic zone, this (the revolution) gives the region a chance of doing the same. Of course, it could be volatile getting there. Should the violence spread, prices of oil may go up very high and hold back economic growth. However, this should be a shortterm phenomenon. Clearly, oil at this time is not for investment, it is for speculation.
Which commodities do you think will do well in 2011?
Base metals, such as copper, will do well due to the increase in industrial demand. Then there is coal and iron ore, the components of making steel. Metals that go into making aircrafts, such as titanium and aluminium will also perform well. Within soft commodities, sugar should outperform and corn will be dependant on demand from China. The US Department of Agriculture has forecasted that Chinese corn import will rise 5-fold over the next four years. Further, in the US, the ethanol blend with gasoline will increase to 15% from 10%. This increase in demand for ethanol will increase demand for food crops. Consequently corn prices are likely to remain high for the long term.
We have had some budget announcements that have made it easier for foreign investments in Indian mutual funds. What is the impact of this change?
Many mutual funds outside of India already invest in the Indian markets and foreign investors access the Indian markets through these funds. Thus, we don't see a great demand for it (direct investment). We also have one fund that we run from Germany, which has been successful. Of course, India has fund managers with great track records, which could draw foreign investment. There are people who prefer local managers, so it is up to Indian asset management companies and how they market themselves to foreign distributors.
Raising the foreign institutional investor (FII) limit in infrastructure bonds and incentivising foreign investment is good since it is an interesting area for long-term investment.
However, each project has to be measured on its own merit. What is important is whether the government is going to dictate prices. it also probably needs to look at more PPP models.
Funds focusing on agri business opportunities have done well in the recent past. What are the reasons for this performance and will it continue?
Global agricultural markets have grown steadily since 2001, accelerating in 2007 with prices of food, agricultural commodities and farmland prices, along with related products and services, rising considerably.
Over the long run, the growth in consumption for agricultural commodities will be unstoppable. Global population is soaring and is expected to reach 8 billion by the end of 2020 and possibly 10.5 billion by 2050 (currently 6.9 billion), which means more people have to be fed every year. The rising incomes in the developing world will translate into demand for better food and higher protein consumption.
Of late, we have seen an unprecedented rise in the prices of soft commodities. Cotton, for instance, has gone up by 114% between July 2010 and February 2011, while sugar has risen by 98% and corn by about 66% for the same period. Extended periods of drought in Russia and Ukraine, abundant rainfall in Pakistan and India, and the floods in Australia have resulted in this rise.
Investment Specialist Bill Barbour
Should investors choose agri funds at the current market levels?
Although valuations are compelling, the prices of soft commodities could pull back since they have had a huge run up. Upstream companies, those related to the farm, such as seeds, fertilisers and farm equipment, are doing well since farm incomes have gone up. The order books for tractors have gone up by about 20% in Europe last year. Upstream companies have been bid up in value by the share market as people tend to follow the herd. However, value adders, who use soft commodities as material inputs, are facing the brunt as costs are high, margins have become thin and these remain relatively undervalued. Perhaps investors would be better off staggering exposure to such funds.
What opportunities does India provide for investment within the agriculture space?
India provides very limited opportunities within the agriculture sector. There are some opportunities, such as Mahindra & Mahindra-the world's largest producer of tractors. In November last year, the market was trading on the higher side. However, since then, valuations have been looking attractive. India has a small listed agricultural sector, including Jain Irrigation, United Phosphorus (fertiliser company) and some tea and sugar companies. There is also a large dairy industry, Amul being the largest company, but it is a cooperative so we cannot invest in it.
What is your view on gold and silver?
Gold is a good long-term investment. The supplydemand dynamics favour a rise in the price of gold. It is real money, not paper money. The value of gold doesn't erode through paper currency being printed.
Currencies have been devalued against real assets, which is why there is an unprecedented demand for assets such as gemstones, gold, art and property. Over a decade ago, central banks were selling gold.
However, this trend has changed now. Central banks, such as those of Russia and China, are accumulating gold to diversify. In fact, a couple of years ago China allowed its citizens to buy and own gold. All major mining countries, such as Canada, Australia, USA and South Africa, have already exploited their gold reserves. This means that supply is limited and is not going to increase by much. All of these should lead to a steady rise in price but it will be volatile, especially when the quantitative easing exercise ends.
| "Currencies have been devalued against real assets, which is why there is an unprecedented demand for assets such as gemstones, gold, art and property." |
What about the increase in the price of oil and where is it headed?
Oil prices have gone up because of what is happening in the Middle East. These countries are ridding off autocrats, who have been ripping off the population. Like the fall of the Berlin Wall in 1989, which led to Eastern Europe becoming a true economic zone, this (the revolution) gives the region a chance of doing the same. Of course, it could be volatile getting there. Should the violence spread, prices of oil may go up very high and hold back economic growth. However, this should be a shortterm phenomenon. Clearly, oil at this time is not for investment, it is for speculation.
Which commodities do you think will do well in 2011?
Base metals, such as copper, will do well due to the increase in industrial demand. Then there is coal and iron ore, the components of making steel. Metals that go into making aircrafts, such as titanium and aluminium will also perform well. Within soft commodities, sugar should outperform and corn will be dependant on demand from China. The US Department of Agriculture has forecasted that Chinese corn import will rise 5-fold over the next four years. Further, in the US, the ethanol blend with gasoline will increase to 15% from 10%. This increase in demand for ethanol will increase demand for food crops. Consequently corn prices are likely to remain high for the long term.
We have had some budget announcements that have made it easier for foreign investments in Indian mutual funds. What is the impact of this change?
Many mutual funds outside of India already invest in the Indian markets and foreign investors access the Indian markets through these funds. Thus, we don't see a great demand for it (direct investment). We also have one fund that we run from Germany, which has been successful. Of course, India has fund managers with great track records, which could draw foreign investment. There are people who prefer local managers, so it is up to Indian asset management companies and how they market themselves to foreign distributors.
Raising the foreign institutional investor (FII) limit in infrastructure bonds and incentivising foreign investment is good since it is an interesting area for long-term investment.
However, each project has to be measured on its own merit. What is important is whether the government is going to dictate prices. it also probably needs to look at more PPP models.
