Rally in equity moves traders out of commodity futures

Daily average turnover of MCX and NCDEX declines by 33% and 46% respectively since July '16

Lured by a sharp rally in the benchmark sensitive index (Sensex), a large number of traders have squared off their position in the commodity market and invested their earnings in shares to take a pie of growing equity markets. Consequently, the volume and turnover in commodity futures exchanges declined sharply over the last one year with a proportionate gain in equity markets.

The benchmark daily average turnover (DAT) on India's largest commodity exchange the Multi Commodity Exchange (MCX) declined by a staggering 33 per cent over the last one year. From the level of Rs 27,443 crore, the DAT of MCX plunged to Rs 18,319 crore, which experts attributed to the sharp fall in the prices of commodities (primarily base metals and energy) trade on this exchange and investors' squaring of position in favour of equity. An MCX spokesperson preferred not to comment on the DAT.

"Low volatility in non-agriculture segment coupled with lack of confidence in the continuity of agriculture contracts have helped investors drive from commodity to equity. Volume in agriculture segment would go very high provided the fear of frequent government interventions fades," said Jayant Manglik, president, Religare Securities Ltd.

Prakarsh Gagdani, chief executive officer, 5paisa.com, however, believes that the transaction cost of equity investment vis-a-vis the facilities on offer plays a dynamic role in attracting investors' attention. "The Indian equity markets are among the most cost-effective worldwide and within that the discount broking segment has brought down costs to a level of absolute irrelevance to the decision of equity investment. We pride ourselves on being the cheapest in the discount broking space. We have simply taken away the cost consideration and discount broking firms such as ours will be the biggest beneficiary of the new breed of investors coming into the market," he said.

A PwC survey last year indicated that 55 per cent investors believe Indian equity market transaction costs are moderate compared to emerging market benchmarks. Within that, 5paisa.com as a discount broker costs 95 per cent of what a full-service broker would charge a customer.

Interestingly, the DAT of NCDEX has also fallen from the level of Rs 3,453 crore in July 2016 to Rs 1,881 crore in May '17. The DAT, however, has improved a bit in June to Rs 1,962 crore. An NCDEX spokesperson said: "The overall volumes in agri-commodities are a result of the interplay of multiple factors, including supply trends across commodities, uncertainty over the new GST regime in addition to equity markets. The long-term potential of the commodity market, however, remains intact. It has been our constant endeavour to offer innovative products which bring value to agriculture businesses. We regularly review our existing contracts, making them more market-friendly. The introduction of options is a big step. We should see some innovative options in agriculture commodities soon."

Meanwhile, the beneficiaries of investors' this move was the National Stock Exchange (NSE) and the BSE that have witnessed a sharp increase in their DAT over the last one year. While DAT of NSE from futures segment jumped to Rs 80,823 crore in May '17 from the level of Rs 62,252 crore from July 16, that on the BSE surged to Rs 49 crore from Rs 16 crore during the period under review.

Interestingly, Sensex and Nifty have jumped by 12 - 13 per cent since July last year. While prices of agri commodities have fallen sharply, non-agri commodities, barring a few, largely moved in very narrow range during the last one year.

There have been many instances where a full-service brokerage would aim to exert undue influence on clients to invest in a manner which would maximise their own fees, rather than absolutely focusing on the long-term interests of the clients. For discount brokerages, where the customer operates on a "do-it-yourself" basis with minimal human interference, this apprehension is also taken care of.

In the case of new age firms like Zerodha, 5paisa.com and others, the investment in the technological interface is high and the company invests in upgrades on a regular basis. Few platforms offer all kinds of financial products like mutual funds, insurance etc, which takes care of multiple investment requirements of clients.

According to Gagdani: "The 5Paisa mobile app is already downloaded more than 100,000 times and has been rated 4.1, the highest in this category. The group pedigree, the cost advantage and the product offering make 5paisa.com a strong player in the discount broking category, one which will grow in market share terms."

Traders also see abundant room for price volatility in equity with not similar range in commodities because of the daily volatility cap.