Commodity Market Thesis Project Report

Thesis on Commodity as an asset class- Implication for producers, consumers, traders and investors

Project Report on Commodity as an asset class- Implication for producers, consumers, traders and investors

Dissertation Writing Help on Commodity as an asset class- Implication for producers, consumers, traders and investors

Area of Research:  Commodity Market

Title of the Thesis:

"Commodity  as  an  asset class- Implication for producers, consumers, traders & investors".

Hypothesis:

The main aim of this study is to establish that commodity is emerging as an asset class. A commodity is something that is supplied in several different places without any qualitative difference. For example: gold, crude oil, copper, wheat and so on. Therefore, barring man-made taxes and transportation costs, their prices would be broadly similar in all locations. So there is a thriving market for commodities worldwide—unlike equities, which are usually country specific. And in the recent past, commodities have become an accepted asset class with significant chunks of smart money being invested in commodities markets worldwide. Commodities are assets that have tangible properties, such as oil, metals, and agricultural products. An investment in commodities may not be suitable for all investors.

Commodities and commodity-linked securities may be affected by overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes, and international economic and political developments, as well as the trading activity of speculators and arbitrageurs in the underlying commodities. Investments in commodity-linked derivative instruments may be subject to greater volatility than investments in traditional securities.

Scope of Thesis

This study argues that Commodities are becoming critical for fuelling India's economic growth. Investment in commodities not only has a balancing effect on the portfolio, but also acts as a natural hedge. International experience shows that while stocks and mutual funds are closely related to each other (since mutual funds typically invest in stocks anyway) and tend to have positive correlation with one another, commodities are a bet on inflation and have a low to negative correlation to other asset classes. Adding diverse asset classes to their portfolios allows investors provide variable downside protection and upside potential which depends on the correlation coefficients of the asset classes vis-à-vis one another. In general, commodities have a positive correlation with inflation and therefore a negative correlation with stocks and bonds and are therefore a well-advised addition to almost every long-term investment portfolio.

Commodities have offered decent returns in the past but they are still considered more volatile asset classes though that remains a statistically debatable issue. But there is no doubt that by adding commodities to a portfolio of assets that are less volatile, you actually decrease the overall portfolio risk due to the negative correlation and are likely to increase your overall expected return. But to get the real benefit of portfolio diversification, the investment must be in direct commodities rather than mining or commodity stocks to cut out the noise of management quality and cash flow issues in companies.

Research Methodology: Data Collection and Analysis

1) Surveys & questionnaire

2) Internet /websites/desktop literature

3) News Papers (Economic Times/Financial Express)

4) Business Magazines/Journals

5) Finance Books

Sample selected for the survery

A structured questionnaire will be administered to 30 respondents who are portfolio managers and research analyst  in commodity markets. These respondents are full-time employees of the Karvy Commodities Broking Pvt. Ltd. The survey intends to extract the recent trend in the retail investor’s investment patterns and their opinion as to commodity emerging as an asset class.

Justification for choosing a particular research proposal:

Commodities are not traditional financial assets like stocks, bonds, or even real estate, where investors are paid for the use of their capital and where the risk is limited to the capital invested. An unwary commodities investor can incur a risk many times larger than an initial investment. Commodities do offer good diversification potential, and their long-run returns may be comparable to that of equities; but the robust returns of 2002-2007 are not representative of the long-term returns from this asset category.

Interestingly, commodities offer excellent diversification possibility in asset risk management. Investment in commodities, in addition to others, not only has a balancing effect on the portfolio, but also acts as a natural hedge. Assessment of relative performance of various assets would show how well commodities perform. Even central banks eye commodities as part of diversification. Gold, for instance, is a wonderful example of a commodity that is widely seen as a safe haven investment and a hedge against inflation. The critical importance of crude or energy complex is beginning to be felt across the world. Commodities tend to outperform other asset classes when an economy is in an expansionary phase. 

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