|»5 Minute Wrap Up by Equitymaster|
On This Day - 11 MARCH 2011
A commodity that is a better indicator than gold...
In this issue:
-------------------------------------------- Free Guide -------------------------------------------- The Definitive Guide To Financial Planning
For once leave them aside and instead and try listening to these two metals: gold and copper. If you heard carefully, they say a lot about the health of the economy. Of course, they both have their own areas of specialty. Gold prices usually gives a prompt diagnosis of monetary disorders and government failures. On the other hand, copper prices are a good barometer of industrial health.
The reason for the same is simple. Copper is widely used in the manufacturing of goods ranging from autos and plumbing pipes to semiconductors and telecom and cable wiring. Hence, a sharp dip in copper prices could mean a slip in industrial demand. Two years ago, when worldwide growth picked up after the crisis, copper had led the rally. And what is happening at the moment? After reaching the peak in mid-February, copper prices have fallen by almost 10%. And guess what? The recently announced US economic data is not really encouraging. And it is not just the US. Surprisingly, China has reported a trade deficit for the month of February. Certainly, this is largely attributable to the Chinese New Year slowdown. However, there are other signs of slowing demand in China as central bankers are nervously trying to combat the rising inflation.
Of course, one should not take metals prices blindly. They cannot be foolproof indicators all the time. There are times when they go to extreme ends. Nonetheless, they can at times predict what humans cannot. Copper especially can be a better indicator than gold because of its early warning signals as compared to the latter.
Well, Indian stock indices have higher allocation to sectors including financial services, energy, capital goods, utilities etc. The Nasdaq-100 on the other hand is weighted towards pharma, media, retail, technology software and hardware space. As you can tell, profits of these companies are more driven by innovation and automation. So the correlation between the two indices may not be too high. But, one needs to keep in mind that economic growth is still mainly coming from emerging markets. Plus, since the Nasdaq-100 consists of a number of tech companies, constant R&D, and the ability to adapt quickly to changes are the key. Either way, geographic diversification does help reduce portfolio risks.
Another interesting outcome of the survey was that a majority of companies see their profit margins remaining under pressure in the coming quarters. This is largely expected on the back of continued surge in commodity prices. However the good part is that the extent of pessimism has declined compared to preceding quarter.
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