Gopal Agrawal, the chief investment officer in India of Mirae Asset Global Investments, is a relatively low-profile name in the country’s asset management space. But at the same time, the South Korea-based fund house is among the most watched on Indian shores, thanks to their Mirae Asset Emerging Bluechip Fund (MAEBF), which has managed to give some of the highest returns in its segment—30 percent over the past three years.
Mirae Asset Global Investments (India), with assets under management of over Rs 2,800 crore as of December 2015, also includes a commodities stock fund, which invests in energy, metals and mining companies across the world. However, in a highly challenging global environment of sharply subdued commodity prices, Agrawal has, for the past three years, advised investors not to put money in lumpsums into the Mirae Asset Global Commodity Stock Fund, but opt for a systematic investment plan (SIP) instead.
Global commodity prices continued their downtrend in 2015 and oil prices hit an 11-year low in January this year. Industrial metals have traded in negative territory through much of last year and factors like weakening demand from China, as it missed some of its growth targets, and the US Federal Reserve’s interest rate hike have led to a weakening demand for metals.
Other traded commodities like gold declined 11 percent in dollar terms in 2015, to $1,050-1,080 per ounce levels. The months leading to the Fed’s rate hike saw higher bond yields strengthen the dollar, putting pressure on gold. The World Gold Council, in a recent report, said it expects gold demand to improve, led by India and China and buying from global central banks.
Agrawal spoke to Forbes India on the global commodity landscape, what investors need to look out for and the investment methodology he has identified to protect investment.
According to him, price correction in most commodities, particularly metals, is nearly complete and they could be nearing their bottom. But time correction is still quite a while away.
When the Mirae Asset Global Commodity Stock Fund was set up in 2007, the investment premise was to ensure that investors take advantage of the rising commodity prices at that time to garner extra returns and also to help them diversify their investments. The world economy was growing at 4-5 percent between 2005 and 2008. But post the 2008 crisis, global economic growth, according to the IMF, has fallen to about 3 percent.
“One needs to have more than 4 percent growth for a better outlook for commodity prices. But till global economic growth reaches 4 percent, I doubt that there will be a big and meaningful recovery in commodity prices,” Agrawal, 43, tells Forbes India.
He explains the rule of thumb for a 4 percent growth: The calculation is as follows—for crude oil, incremental oil demand equals world GDP growth rate minus 2 percentage points. So if the world economy is growing at 3 percent, then the world oil demand is growing at 1 percent, Agrawal says. “If one is to see a 4 percent global growth, two-thirds of incremental growth would have to come from the emerging world, as they are larger consumers of commodities,” he says.
This is what the world saw in the previous decade (2000-2010), when China continued to expand rapidly. But if the emerging world is not faring well (as is happening now), then commodity prices will continue to be under pressure. The developed world may not see a sharp growth in demand for commodities as they are consuming what they can, Agrawal adds.
He also points out that India has the potential to drive prices up, since it is a large country with growing aspirational values and government spending power starting to rise. China, of course, is still the dominant factor, but considering that it grew too soon and too fast, we are seeing a slowdown there. “Growth in China is also a function of global growth, particularly in Europe. If Europe recovers, it will assist China in a major way. But this lower commodity price environment is unlikely to change very fast,” he says.
On the global oil market, Agrawal believes that it could rebalance somewhat by the end of 2016. “Global oil prices are unlikely to cross $60 per barrel but may rise to $50 levels after a small dip,” he says.
Currently the oil market is oversupplied to the tune of close to 2 million barrels per day, and has a large inventory of one month.
Globally, demand for oil is forecast to increase by 1 to 1.2 million barrels in 2016. US production of oil is expected to drop by 0.5 million barrels from its peak; also, some Canadian sand oil will go off the market, so net demand and supply could match by the end of the calendar year, which could lead to an uptick in oil prices. That could give a push to other commodities, like industrial metals, says Agrawal.
In the case of industrial metals, with aluminium at $1,460 per tonne, copper at $4,500 per tonne, nickel at $8,300 per tonne and zinc at $1,450 per tonne, international prices are now close to the bottom, he says. “Based on thermal conductivity principles, copper prices should be at least three times the price of aluminium. So in this case, we are very close to the bottom of the commodity price cycle,” says Agrawal. And industrial metal prices might only fall further if global oil prices slip further, he adds.
On the gold front, too, international prices are near the bottom at $1,080-1,090 per ounce. A bottom can be expected at close to $1,000 per ounce levels, so international markets could see some sort of a bounce back in the near term.
The Mirae Asset Global Commodity Stock Fund, which is benchmarked to the S&P Global Natural Resources Index, was the first of its type. But after the credit crisis, it has become difficult for the fund house to generate positive returns for this scheme. The corpus of the fund has shrunk by over 80 percent to Rs 7 crore from the Rs 56 crore it had at its peak in 2008. Several investors have already exited the scheme, with profits, when commodity prices recovered in the 2011-12 period.
Agrawal follows a specific investment methodology: Invest in companies which are leaders on the cost curve, have strong balance sheets and hold the possibility of a growth in volumes, so they can survive the turmoil.
The Mirae Asset Global Commodity Stock Fund had invested in heavyweights like BHP Billiton, Reliance Industries (owners of Network 18 that publishes Forbes India) and CNOOC Ltd., as part of its portfolio. The fund invests about 10 percent in agri-commodity companies, 40 percent in energy firms and the balance in metals, mining and gold companies.
From an investment viewpoint specific to the fund, Agrawal has told investors to only put money in this fund through systematic investment plans (SIP), rather than making lumpsum investments. This is because commodity bottom cycles are usually longer than that of equities.
Agrawal will now look for triggers like production cut announcements from miners. “Major producers of base metals have started announcing production cuts, which should ease pressure on metal prices,” he says.
He also awaits administrative measures taken by various governments to protect their domestic industries, and hopes that China will shut down uneconomical capacities, which will help balance prices in the global market. “China’s policymakers will have to invest more to boost domestic infrastructure,” he says.
Agrawal also emphasises that commodities will continue to be a direct play on global growth. If the US central bank does not further increase interest rates, then global commodity prices can bounce back. “There is a fair possibility that the US Federal Reserve may not rush into a fresh rate hike immediately,” he adds. “We are still far away from global economic growth climbing back to about 4 percent; it could easily take more than two years for that to improve.”
(This story appears in the 19 February, 2016 issue of Forbes India. To visit our Archives, click here.)