What can investors expect from the emerging markets in the world, especially the BRIC nations?
This is the million dollar question haunting many people who plan to take a plunge into the tricky world of commodity trading. If you take the markets in emerging economies of Brazil, Russia, India and China, during the past four years they have shown roaring success.
The Morgan Stanley Capital International Emerging Markets index rose 29 per cent last year, led by an astounding 53-per-cent gain in BRIC countries.
However, before taking the plunge, especially in the field of commodity trading, it is better to know what it is.Commodity trading is as complicated as any other investment and needs some research work if you want to make some profit.
One basic rule is commodity markets thrive when economies grow and at present India is on the cusp of a global economic boom. Soon, India will be an important contributor to global commodity trade. Given the existing situation, commodity trading here is a lucrative option.
During the past two years, commodity market has got more regularised in India with three fully computerised exchanges becoming operational -- the National Multi Commodity Exchange of India Ltd, the National Commodity & Derivatives Exchange Ltd and MCX.
In commodities, the assets have physical need and consumption. Hence, price fluctuations are automatically checked. However, the commodity portfolio is more global than equity which means risks may emanate from Sydney or Chicago and not only from India. Moreover there are rupee and dollar rates to monitor.
In commodity trading, at any point there are three concurrent contracts starting from the 21st of each month, each priced differently. But you pay only a margin amount which varies according to the commodity.
The increase or decrease in price is reflected in your margin account everyday. You stand to make huge profits if the market always goes up and the appreciation in the market is good enough to cover your rollover costs. At the end of the contract period (one-three months), you can withdraw your net profit and take a fresh position or buy a new contract. You can, though, terminate your contract before the due date, even on the day you take it.
However, commodity trading is closely linked to the markets. So, it's important to keep a watch on the markets if you are planning to invest in emerging economies.
At present the main question about the emerging economies is whether they have any more room to grow. The answer, market analysts say, is that they most certainly do.
But whether they actually will grow in 2007 will depend on the resilience of the global economy, and whether the domestic economies in emerging markets will pick up the slack from fading commodity exports, long the staple of emerging market growth.
Experts say emerging markets have shown more severe responses to temporary shocks in recent years as their valuations have climbed. Despite four years of big gains, emerging markets are nowhere near as overheated as they were in 1995, when they were trading at a premium to markets in major industrialised economies.
However, some experts fear that after four years of good times, investors have become complacent about the risks inherent in emerging market investing. The markets received something of a wake-up call on that front recently when Venezuelan President Hugo Chavez pledged to nationalise more of the country's economy and Thailand slapped new restrictions on foreign ownership.
It's a warning sign, opined an analyst. People were overlooking the political risk till now. Moreover, emerging markets still depend heavily on commodity exports and while that dependence has been a boon for those markets during the commodity rally, it leaves those markets at risk if the current downturn in commodities turns into a bear market.
According to an analyst, with global economic growth slowing, there could be a general defensive shift in capital away from traditionally risky markets and into safe-haven holdings. That could pull money out of emerging markets this year.
Another source said given the global slowdown and weaker commodity markets, investors should expect neither huge returns nor huge outperformance by emerging markets this year.
