Copper is considered as an economic bellwether because the ‘red metal’ is used in many industrial applications and products. In fact, more than two-thirds of the world’s red metal goes directly into building construction and electronics.
Therefore, the stronger the economic outlook and industrial activity is, the greater demand for copper.
On the other hand, Gold is a precious metal and is typically considered a safe-haven asset that is non-interest-bearing. The stronger the economy and the higher real interest rates go, the less appealing it is to own gold and vice versa.
That’s why comparing the relative performance of Copper and Gold gives interesting indications about the current state and outlook of the global economy.
The chart below shows a 15-year history of the Copper (green line) and Gold (blue line) prices against the earnings per share (EPS) earnings growth of the ASX 300 (orange line). As expected, trends in the Copper and Gold price tend to anticipate whether future earnings growth will be higher or lower.
Over the past few months, Copper has begun underperforming Gold, which is consistent with the ASX 300 one-year EPS growth falling to just 1.26% by December 2023, down from 16.84% in December 2022.
Earnings forecasts for the ASX 300 have remained robust relative to its global peers, due to many of its underlying company constituents being ‘value’ orientated, with their earnings largely benefitting from higher interest rates and commodity prices (Financials, Material and Energy sectors). This supports Clime’s view that whilst the economic outlook for 2023 remains challenging, the ‘Aussie’ ASX remains attractive and is underpinned by strong relative forecasted earnings and dividend growth.
Source: FactSet, Clime Investment Management
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