Commodities and energy have been hot since last couple of years. Most of the hedge funds, private equity funds and venture capital funds have been investing and trading the asset classes for better growth and return opportunities. The rational is simple about demand-supply mismatch that oil and precious commodities’ supply is limited or the future is unforeseeable while consumption is increasing resulting in higher commodity prices.
Some simple observations based on demand-supply scenarios are:
Commodities
1. Two of the largest populated countries in the world China and India have population of 1.3 billion and 1.1 billion respectively and it has been estimated that India will surpass the China population by 2030. Let’s take it for India where per capita income in India has increased from merely ~$2000.00 in 2000 to ~$4500.00 in 2007 as per World bank reports. Since per capita income is increasing and because of better market sentiments and more job opportunities in Software, Hardware, Auto, Pharma, Business, Exports and host of other sectors, food habits of people is changing and more options for food is available all across the towns. More and more number of mall and recreational centers opening leading to more consumption on transportation, gas and commodities leading higher commodity prices.
2. The biggest recession since world war 2 has made people think before they invest that the asset class is right one and would not create future bubble preserving the investment value. Fed has decreased interest rates to 0% for lending to banks and helping to continue the money and credit supply in the market by providing stimulus package to critical industries, so as the industries can start creating/maintaining new jobs and the nation can survive on consumers’ spending patterns. Because of 0% interest rates and stimulus package the economic recovery is faster and ‘V’ shaped. The faster recovery and longer sustained 0% interest rate will further create inflation, hence increasing/inflating the demand of commodities like Gold where people is thinking a safe investment option.
3. Since the interest rates in the lower range around 0%, there is no benefit to risk-savvy investors as they are not getting any good debt returns, leading them to invest in currently considered safe heaven investments as Gold which has very limited production. When lot of people chase very limited resource, the resource price going to inflate realistically.
4. Emerging markets have seen loss of agricultural land because more land is getting converted towards industrialization and housing, leaving less land for cultivation and this widens the demand-supply gap, leading to higher commodity prices.
5. Since many governments have legalized mixing ethanol with oil, demand for ethanol has been increasing constantly. While ethanol is produced mainly from corn, there is huge demand-supply gap in corn production leading to higher corn prices. This will continue till we have some other alternative fuel to replace oil.
Energy
1. Oil supplies are limited and oil companies are spending a lot on discovering more oil resources. Till the time there is no viable alternative found for Oil, oil is going to remain hot commodity. Although oil prices sky-rocketed in 2008, emerging market’s oil consumption is increasing everyday, because people have more money and their spending pattern is changing. Due to this demand-supply imbalance, again there will be rise in oil prices.
2. Solar-energy and wind-energy are alternative energy sources to oil and they have potential to generate electricity and act as viable energy source, but the energy produced using the sources neither have a consistent pattern of energy production nor it is cheaper than the existing sources like coal and oil. Solar and wind energy are very much dependent on the geographic conditions and cannot be implemented everywhere. Further they require substantial investment to produce the energy. In future when oil/coal prices sky-rocket, this sources might be beneficial in terms of cheaper energy needs.
3. Since the limited supply of oil, there is renewed interests in searching alternative energy fuels. Some venture capitalists and universities are investing heavily inventing alternative energy sources.
Emerging Markets:
1. Since Goldman Sachs coined the term BRIC in their 2000’s research report, Emerging markets such as China and India have remained focused for better growth engines for many funds. Due to surge in consumption demand, stable governments, and better economy prospects emerging markets give better returns than their developed world counterparts. As specified earlier, the per capita income in India has surged leading to better consumption growth story. As per sources, China and India continue to grow at 7.5% and 10.5% of their GDP respectively. Apart from that government’s spending on infrastructure & power, health/medicine sectors will provide necessary boost for the growth as well as good indications to foreign investors to invest in the developing countries, where hugh thrust on developing infrastructure and providing services at cheaper rates will boost the economy.
2. International Olympics Committee recently chose Brazil for hosting the 2016 Olympics and Brazil is also hosting 2014 FIFA World-cup. For this Brazilian government will spending hugh money on building roads, bridges, and stadiums, providing lots of jobs and business opportunities. As per consumer reports, Brazil will witness 11-12% of GDP growth and will fetch millions of foreign visitors. It will boost hotel, airlines, local restaurants and host of other local businesses including the currency.
Based on the points discussed above commodities like gold, silver, oil, gas will give better returns than index funds or any other asset class, but it give little comfort to consumers because they will see their daily budgets shooting the skies. Investing in emerging markets companies is associated with risk towards government stability, foreign policies and management, but however it will give better returns. Infrastructure companies in emerging nations that construct roads, build bridges and infrastructure, produce power will give very good returns.
The observations are solely based on demand-supply scenarios, and they do not represent any speculation on the commodities e.g. oil and gold, but rather a conservatively optimistic views of the author on the particular asset classes.
Saturday, December 12, 2009
Sunday, August 2, 2009
Do Banks' current quarter results represent an economy's outlook?
In my last blog, I had discussed recently concluded quarter results about various firms like Goldman Sachs, JPMorgan Chase, Microsoft, Amazon. Looking at the current economic outlook and the way the organizations are slashing their payroll to remain in profit, one question comes to everyone's mind "Do the quarterly results of the firms represent the economy outlook?"
Goldman Sachs declared record quarterly profits in their history surpassing analyst expectations, while Microsoft and Amazon could not meet analyst expectations to reach their targets. We can consider sentiment plays an important part when DOW-JONES tumbled upto 6600 in Mar'06 in response to continuous failure of banks in US and most of the retailer's same stores sales were plummeting. Since March '09, DOW has recovered upto 9200 in July 31st, increased ~40% and it shows the optimism across the board rather than an economic outlook. There are not much changes to the economy since March '09, as Unemployment has increased from ~8.5% to ~9.7% from Mar '09 till Jul '09, 57 more banks have filed Chapter 11 bankruptcy since Jan '09, industries are still cutting payrolls, job cuts were 467,000 in Jun '09, 322,000 in May '09.
Results of the banks are showing optimism in the economy as there is positive sentiment in the economy for signs of stabilization, but they do not provide the exact picture of the economy. Rather firms whose profits are directly related to the consumer spending such as Discount Retailers e.g. Walmart, Sears, Electronic retailers like RadioShack, BestBuy, J&R, online retailers e.g. Amazon, OfficeDepot and most of the retailing firms' results are not showing any improvement even though they are cutting their payroll to remain in profit. And till the time unemployment is rising, and there wont be any positive signs on people's spending there can't be any growth to the economy.
Obama led government is putting their every effort to increase consumer spending and provide employment by increasing construction, bridge, roads related contractual works. But DOW's 2600 points jump from Mar '09 till Jul '09 does give breath to consumers till the time teh industries feel confident about the economy and again start hiring.
So we can say economy is stabilizing and it will take 9/12 months before it shows good signs of improvement.
-Amit
Goldman Sachs declared record quarterly profits in their history surpassing analyst expectations, while Microsoft and Amazon could not meet analyst expectations to reach their targets. We can consider sentiment plays an important part when DOW-JONES tumbled upto 6600 in Mar'06 in response to continuous failure of banks in US and most of the retailer's same stores sales were plummeting. Since March '09, DOW has recovered upto 9200 in July 31st, increased ~40% and it shows the optimism across the board rather than an economic outlook. There are not much changes to the economy since March '09, as Unemployment has increased from ~8.5% to ~9.7% from Mar '09 till Jul '09, 57 more banks have filed Chapter 11 bankruptcy since Jan '09, industries are still cutting payrolls, job cuts were 467,000 in Jun '09, 322,000 in May '09.
Results of the banks are showing optimism in the economy as there is positive sentiment in the economy for signs of stabilization, but they do not provide the exact picture of the economy. Rather firms whose profits are directly related to the consumer spending such as Discount Retailers e.g. Walmart, Sears, Electronic retailers like RadioShack, BestBuy, J&R, online retailers e.g. Amazon, OfficeDepot and most of the retailing firms' results are not showing any improvement even though they are cutting their payroll to remain in profit. And till the time unemployment is rising, and there wont be any positive signs on people's spending there can't be any growth to the economy.
Obama led government is putting their every effort to increase consumer spending and provide employment by increasing construction, bridge, roads related contractual works. But DOW's 2600 points jump from Mar '09 till Jul '09 does give breath to consumers till the time teh industries feel confident about the economy and again start hiring.
So we can say economy is stabilizing and it will take 9/12 months before it shows good signs of improvement.
-Amit
Saturday, August 1, 2009
Kutch/Gujarat an ideal investment destination in India
Kutch is a growing economic and industrial hub in one of India's fastest growing states,Gujarat and it is becoming an ideal investment destination for big investors and big business houses in India. As a nature Kutch-Gujarat is almost dead agricultural region where the average annual rain is 250mm and most its land is covered with sand. But since 2001's earthquake epi-center in Kutch region and Gujarat's Chief Minister Mr. Naredra Modi's ideal thoughts to grow industries in the region has attracted investors from all around the world. Government declared tax incentives upto 15 years.
Kutch's Kandla port is considered the most busy port in India after Mumbai's Jawaharlal Nehru port and has attracted lots businesses related to transportation and import/export in the region since decades. And since Mr. Narendra Modi's ideal sight of converting an idle region into a business destination, land prices increased more than 10/15 times in a span of 7 years(this depends on location and growth oriented areas). And due to large tax incentives and government's 'Vibrant Gujarat' initiatives it attracted Rs.12,000,000 Crore worth of MOUs in 2009's event to invest in businesses. Apart from Kandla port, Mundra port is developed by Adani Industries whose businesses range from pickel export, power/coal trading, natural gas trading, power and import/export.
The industries who are investing includes World leader in Wall Clock Manufacturing Ajanta group's CFL plant, Nissan Motors manufacturing plant that will export the assembled Nissan motors to Europe region and host of businesses(including Welspun group in Anjar, JayPee group, Jindal group and couple of windmill farms) who wants to take advantage of the tax incentives and its ideal destination for import/export market. Sanghi industries is having India's biggest cement plant at a single location and currently expanding.
Kutch is mineral rich region with very large reserve of Lignite, Gypsum and lot of other mineral. GMDC(Gujarat Mineral Development Corp) and lot of Cement industries are dependent on this materials are expanding their wings in the mineral rich region.
In all, Kutch's ideal location and geographical benefits would help it attract lots of manufacturing businesses and help to provide more synergies to export-focused businesses.
View invited from readers.
Amit
Kutch's Kandla port is considered the most busy port in India after Mumbai's Jawaharlal Nehru port and has attracted lots businesses related to transportation and import/export in the region since decades. And since Mr. Narendra Modi's ideal sight of converting an idle region into a business destination, land prices increased more than 10/15 times in a span of 7 years(this depends on location and growth oriented areas). And due to large tax incentives and government's 'Vibrant Gujarat' initiatives it attracted Rs.12,000,000 Crore worth of MOUs in 2009's event to invest in businesses. Apart from Kandla port, Mundra port is developed by Adani Industries whose businesses range from pickel export, power/coal trading, natural gas trading, power and import/export.
The industries who are investing includes World leader in Wall Clock Manufacturing Ajanta group's CFL plant, Nissan Motors manufacturing plant that will export the assembled Nissan motors to Europe region and host of businesses(including Welspun group in Anjar, JayPee group, Jindal group and couple of windmill farms) who wants to take advantage of the tax incentives and its ideal destination for import/export market. Sanghi industries is having India's biggest cement plant at a single location and currently expanding.
Kutch is mineral rich region with very large reserve of Lignite, Gypsum and lot of other mineral. GMDC(Gujarat Mineral Development Corp) and lot of Cement industries are dependent on this materials are expanding their wings in the mineral rich region.
In all, Kutch's ideal location and geographical benefits would help it attract lots of manufacturing businesses and help to provide more synergies to export-focused businesses.
View invited from readers.
Amit
Sunday, July 26, 2009
US Economy Review. 07/26/2009
Goldman Sachs(GS) reported their earning $4.93 far ahead than estimated $3.53. Their Equities and FICC generated revenues $3.18B and $6.8B respectively amid a better stage set in trading environments. Following GS, JPMorgan Chase which bought Bear Sterns and Washington Mutual(WaMu) reported good results and these events helped DOW to climb 937.14 points from 8157.10 to 9093.24 in a matter of 10 business days. Is the US economy on its track to rebound?
No doubt the economy is showing signs of stabilizing and DOW has recovered from 6600 points in Mar'09 to 9100 in Jul'09 and many of the banks have returned their share of Stimulus money back to the government, but still Obama led government is concerned about how to get the economy on track, generate more employment, keep unemployment as below as possible and get back the consumer spending. US' peer Spain is facing 17.7% unemployment and it could go upto 22-24% by mid next year if the industries will keep on slashing jobs at the same rate and economy does not show any signs of improvement.A bloomberg article shows how bad situation is there in Spain and it has ~30% unemployment population among euro region. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aOBGPyetNGIg.
Obama led administration is putting every effort to fix the economy related issues, but still the economy is not showing any signs of growth as the unemployment is around 10% and none of the industries are showing any signs of hiring, putting pressure on government on how to tackle the problems the economy is facing, whether one more stimulus required to boost the consumer spending? Since consumer spending is core to get the economy on track. But current results from Microsoft and Amazon are showing dizziness how much time it will take to get on track, how the consumer spending and the companies are cutting their expenses. MS missed its revenue and net profit projections and for the first time since going public and it reported negative revenue growth. The same way Amazon missed its revenue and net profit projections even though their Kindle 2 was a big success in digital e-Book market surpassing Kindle 1 sales. And couple of companies declared their negative results amid less consumer spending indicates recession might prolong.
World leaders at the currently concluded G20 summit are concerned about how the get back the consumer spending and generate more number of jobs, and world reserve currency as USDollar is showing its weakness and most of countries who have their foreign exchange in US Dollar are seeing their values plummeting.
So seeing a rosier picture for couple of days in DOW, we can expect the market to correct to some extent and till the economy is not showing firm signs it would trade range bound 8500-9000 points.
I will keep on posting market views as and when getting some time.
No doubt the economy is showing signs of stabilizing and DOW has recovered from 6600 points in Mar'09 to 9100 in Jul'09 and many of the banks have returned their share of Stimulus money back to the government, but still Obama led government is concerned about how to get the economy on track, generate more employment, keep unemployment as below as possible and get back the consumer spending. US' peer Spain is facing 17.7% unemployment and it could go upto 22-24% by mid next year if the industries will keep on slashing jobs at the same rate and economy does not show any signs of improvement.A bloomberg article shows how bad situation is there in Spain and it has ~30% unemployment population among euro region. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aOBGPyetNGIg.
Obama led administration is putting every effort to fix the economy related issues, but still the economy is not showing any signs of growth as the unemployment is around 10% and none of the industries are showing any signs of hiring, putting pressure on government on how to tackle the problems the economy is facing, whether one more stimulus required to boost the consumer spending? Since consumer spending is core to get the economy on track. But current results from Microsoft and Amazon are showing dizziness how much time it will take to get on track, how the consumer spending and the companies are cutting their expenses. MS missed its revenue and net profit projections and for the first time since going public and it reported negative revenue growth. The same way Amazon missed its revenue and net profit projections even though their Kindle 2 was a big success in digital e-Book market surpassing Kindle 1 sales. And couple of companies declared their negative results amid less consumer spending indicates recession might prolong.
World leaders at the currently concluded G20 summit are concerned about how the get back the consumer spending and generate more number of jobs, and world reserve currency as USDollar is showing its weakness and most of countries who have their foreign exchange in US Dollar are seeing their values plummeting.
So seeing a rosier picture for couple of days in DOW, we can expect the market to correct to some extent and till the economy is not showing firm signs it would trade range bound 8500-9000 points.
I will keep on posting market views as and when getting some time.
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