Coppers reclaimed correlation with emerging markets equities may limit its prospects in 2014

Jan 02 2014, 12:42 IST
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SummaryAlthough speculation around the US Federal Reserves decision to scale back liquidity weighed on the entire commodities pack since the second half of 2013.

Although speculation around the US Federal Reserves decision to scale back liquidity weighed on the entire commodities pack since the second half of 2013, it resulted in copper reinventing its strong association with the economic activity in emerging markets (EMs).

The base metal, which is regarded as the barometer of economic growth through its consumption in crucial industries, reestablished its strong correlation with the emerging market equities as the latter underperformed their developed market counterparts. For the year, the MSCI world index, representing the developed markets, rallied as much as 24%, on the back of renewed hope of an economic turnaround in these countries.

However, the benchmark copper prices reflected the lower delta of economic growth in emerging market countries like China, which are regarded as the key driver of copper consumption in the last couple of years. It is not surprising then that the spot copper prices on London Metals Exchange (LME) lost nearly 7% of its value in the year, reflecting its strong correlation with the MSCI emerging market index that declined 5% in the period.

For the last one decade, the correlation between these two parameters stands at a strong 94%, while that between copper prices and the MSCI world index remains at a healthy 71%. During this 10-year period, copper has always acted as a lead indicator of the global economy and at least on five instances, it headed the recovery in equity

markets, including the turnaround in markets in March 2009.

If this strong link continues in 2014, emerging market equities may be looking at limited gains, given that market experts are not very upbeat on a recovery in copper prices.

Barclays says while copper prices are trading at more than 20% below where they were when business confidence was last this strong, the gap is unlikely to close just yet given a large number of short-term negatives, including a still sluggish outlook for the global economy, with big concerns around the outlook in key commodity consumers, such as China, Brazil and India.

Some point out that although a gradual improvement in the global economy may bode well for consumption of some of the key base metals that have witnessed strong surpluses since 2008 crisis, the supply overhang for copper may extend

in 2014.

Unlike metals like Nickle and zinc that have started facing supply side issues, copper oversupply is likely to sustain in 2014.

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