EM: Beware Of Breakdown In Industrial Metals Prices

The recent breakdown in industrial metals prices in general and copper in particular is heralding more downside in EM risk assets.

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Historically, EM share prices have been tightly correlated with commodity prices in general and industrial metals prices in particular. The reason is that all of them correlate with global growth, especially EM economic conditions.

While a rise in commodities supply is certainly a major factor behind the commodities price deflation, global commodities demand is weakening as well.

We see no reason for the correlation between commodity prices and EM risk assets to change.

Our country allocation in the EM space has been positioned for a broad-based decline in commodity prices and our EM team maintains their stance: equity overweights are Taiwan, China, Korean technology and domestic stocks, Malaysia, Poland, the Czech Republic and Mexico. EM equity underweights remain Brazil, Colombia, Indonesia, Turkey, South Africa and Thailand as well as Korean autos, materials and industrials.

China Stimulus Package: Curb Your Enthusiasm

China officials recently announced that the government is accelerating 300 infrastructure projects valued at 7 trillion yuan ($1.1 trillion) this year. At first sight, that is considerably larger than the stimulus package of 2009-2010, which gave a significant boost to Chinese growth at the time. However, we doubt a re-play is about to occur.

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This time, China’s anticorruption pledges will have meaningful consequences for the speed at which investment can get done. The announced projects will be funded by the central and local governments, state-owned firms, loans and the private sector. At various levels of bureaucracy in China, officials are now far more worried about staying out of the crossfire of anticorruption initiatives than about boosting GDP numbers. This is a significant change since 2010: despite the larger stimulus numbers today, it will take much longer for investment spending to be delivered.

Our view continues to be that stimulus initiatives to date will not be enough to meaningfully change the outlook for China. The economy continues to grind away at or near 7%, which appears enough to keep unemployment in check. As long as this is the case, the Chinese government is unlikely to be forthcoming about “game-changing” growth-boosting policy initiatives.