By Sreekumar Raghavan
Is it boom or gloom time for commodities? Experts may wax eloquent on this for weeks after the global market meltdown. But a clear indication emerging across the globe is that commodities now hold a charm not only for investment wizards like Jim Rogers but also for institutional investors worldwide.

The only difference now is that investors are becoming more diversified and more sophisticated in their approach towards commodities. At a recent conference, Sean Mulhearn, global head of commodity sales at Standard Chartered Plc, said institutional investment in commodities is set to rise. The California Public Employees’ Retirement System, or Calpers, the largest pension fund in the US, indicated in February that it plans to invest as much as 3% of its portfolio in commodities up to 2010.

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Investors are still positive on the outlook for commodities but after the collapse of US investment bank Lehman, the focus has turned to counter-party risk. “The outlook is pretty uncertain ... but in two years’ time we will have a commodity allocation of 4-5 per cent,” said Ronan O’Connor, head of risk management at the Irish National Treasury Management Agency. That is up from a commodity allocation target of around 2 per cent now. O’Connor works with asset allocation of the Irish National Pensions Reserve Fund, the 35th largest pension entity in Europe which manages around 20 billion Euros.

A few months ago when I asked Sushama Srikandath, COO of AVT McCormick and chairperson of All India Spice Exporters Forum (AISEF), whether spices export would be affected by the US recessionary trend, she said it was unlikely. Spices do not account for a larger weight in a family food budget in the US and whatever is being consumed will continue to be consumed. Overall, the spices consumption of an average American is anyway rising. Indian spices export will continue to rise at least marginally.

Raajiv Sharma, senior vice-president at Motilal Oswal Securities Ltd, said the best way to invest is to look at where large investments are taking place. Look around, you will find that money is pouring into infrastructure, real estate, energy, telecom, and certain commodities. The top companies in these segments can be targeted for investment as a safe bet, Raajiv Sharma said. But the investment should be made before the boom begins.

Frank Holmes, CEO of US Global Investors, a money management firm honed in on the commodity bull market, is upbeat on commodities sector. He cites numerous studies ― one by Booz Allen Hamilton, as well as ones by World Energy Outlook, the US Department of Transportation, the OECD and a host of other official-sounding places. But the total bill, give or take a few trillion, is about $41 trillion out to 2030 — for water, power, roads and bridges, as well as marine and seaports.

Frank Holmes talks of “megatrends” that take place in different points of time. There was the massive growth of infrastructure in the 50s and 60s, which included the postwar rebuilding of Europe and the massive highway system build-out in the US. There was the 1990s’ megatrend, which led to massive growth in information technology and data communications. And there is the present megatrend: Unprecedented change in global growth driven by globalization, urbanization and wealth creation, which leads to a global infrastructure boom on a massive, intractable scale.

Is a megatrend on already? Holmes believes some mega population shifts are already taking place. By the end of 2008, half of the world’s people will live in urban areas. Leading the way are some 500 million Chinese and another 540 million Indians. The world’s cities are getting a lot bigger. Beijing alone grew from 12 million to 16 million in the past decade. Plus, there are a lot more souls on the orb than ever ― 6 billion of us. Next year, the world’s total urban population will exceed the total world population in 1965.

This helps drive economic growth. Asia as a whole, for example, is building five times more homes than the US. Incredibly, China alone is constructing 80 per cent of them. This, in turn, drives consumption of many commodities, including things you may not think of immediately ― like cement.

Asia ― excluding Japan ― uses about 14 times as much cement as the US. Asia ex-Japan has also overtaken the US in steel production by a country mile. Asian steel production is more than six times the US’s. Electricity consumption is 32 per cent more than the US. As fast as the Asian economies are growing, their demand for power is growing faster. This means increased use of aluminum, copper, iron ore, coal and nickel ― all basic infrastructure materials.

Holmes said that to satisfy the global demand for copper, the world would need to mine as much in the next 25 years as it has up to this point in history. These predictions may prove wildly inaccurate. But even if they are only directionally correct, it points to a long bull market in the basics. Stanchart’s Mulhearn feels institutional investors should take a long-term view.

Mulhearn said he estimated that institutional exposure to commodities had increased from around $75 billion three years ago to around $300 billion today. He feels investment by pension and hedge funds had led to increased volatility in commodity markets, especially in spot markets, and as positions are rolled over in nearby dates as index funds move in and out. “As soon as a forecaster tries to predict prices based on fundamentals, the market expects it to happen overnight."

But with large investment banks struggling or even filing for bankruptcy protection, as in the case of Lehman, structured products were seen less safe than other investment vehicles such as Exchange Traded Funds (ETFs) or mutual funds.

“Industrialization in India and China will continue to underpin long-term demand,” Mulhearn said. Stanchart increased the size of its commodities team in the past 12 months to cater to growing demand from the bank’s corporate clients for more extensive and sophisticated ways to hedge risk.

Raajiv Sharma says that sectoral investments should be made carefully so as not to put all eggs in one basket but a diversified portfolio. Sectors are sections of the economy that have similar characteristics. They’re really no more than groups of companies that are in the same business. In other words, if the economy is like the theatre, a sector is the orchestra section within the theatre. Smaller than the theatre itself, but not quite an individual seat yet.

However, there are reports that the US woes have caused a reversal in commodity contracts and commodity mutual funds. It is true that with dollar gaining strength, certain commodities face downward pressure. And following the US pressure, some commodities are witnessing selling pressure. In order to meet the demand for cash, hedge funds and dealers unwind their positions wherever it is possible.

Even in crude oil, there is a pronounced fall. The economy is now facing a cyclical down turn in foreign countries. With India and China growing very fast, the impact will be of a temporary nature.