Base Metals Outperformed Commodity Index in 2017 - Chart Of The Day 4 January 2018 - Equitymaster

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Base Metals Outperformed Commodity Index in 2017
Jan 4, 2018

2017 was the year of the rally. The BSE Sensex and the Nifty index were up 28% and 29% respectively. The mid-cap and small-cap indices outperformed the frontline indices.

Many investors talk about the stock market's gains in 2017, but another top-performing asset class was base metals, such as copper, zinc, nickel, and other industrial metals. Base metals were the leader in the commodity asset class and outperformed the broader commodity index in 2017.

From the data revealed in the chart above, base metals such as aluminium, copper, zinc, and lead went up by 20-30% compared to the Bloomberg commodity index of 2.4%. This rally was driven by increased economic activity, economic stimulus in China, and global supply disruptions.

However, the major reason for this rally was a decline in the US Dollar index by 8.6% in 2017. Typically, there is an inverse relationship between the value of the dollar and commodity prices. When the value of the dollar weakens against other major currencies, the prices of commodities generally move higher.

But what about 2018?

China supply-side reform holds the key to metals' outlook, and this will be the main focus for the market in 2018. For example, in 2017, China's supply reform policies supported the price rise in aluminium. However, going forward aluminium faces the rising risk of a supply response, both inside and outside China.

In the short term, however, restocking of steel, iron ore in the first quarter of 2018 could generate a typical seasonal rally. Beyond this, it is sustained demand, industrial production levels, particularly in China, and supply-side discipline that will determine the long-term outlook for metals.

Data Source: Business Standard

This Chart Of The Day was published in The 5 Minute WrapUp - Is it Wise to Ignore Bitcoins?

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