According to the conventional wisdom Fisher Investments UK reviews, metals prices provide hints at the economy’s direction – which could be useful for investors assessing the economic cycle. But according to our research, metals don’t foretell shifts in economic growth trends.
The conventional wisdom underpinning metal prices’ supposed prescience makes intuitive sense. A growing economy conjures images of rapid construction – e.g., the building of homes and offices – and robust factory output. That requires raw materials – think iron ore, a key ingredient for steelmaking, or copper, which has widespread applications in construction and electrical equipment. We have seen some market analysts refer to the latter as Dr. Copper due to its supposed ability to assess an economy’s health. If the price is rising, that implies strong demand – and lots of building – whilst falling prices indicate weak demand, which may foreshadow an economic slowdown or recession (a prolonged period of overall falling economic activity) to come.
Whilst the logic is understandable, we don’t think it applies much to the modern global economy. Now, the rationale does have some historical basis. Heavy industry drove growth in many major economies after the industrial revolution began in the mid-19th century – see Germany’s reputation as an industrial powerhouse, based on Fisher Investments UK’s reviews of history. But this thinking also focuses solely on metal demand and overlooks supply-side changes.
According to Fisher Investments UK’s reviews of commodity cycle trends, higher prices spur investment in production efforts (e.g., mines). It takes time for mines to come online, which caps supply – and keeps prices elevated – which can motivate more investment. But eventually, new mines raise production and supply, eventually causing a supply glut – and leading prices to fall. Yet this says little about actual economic activity or demand itself. This is a big reason why copper, iron ore and other metals lack predictive power, in our view.
Also, heavy industry’s share of economic activity in most major developed economies has waned over time whilst services’ slice has risen – implying the latter has more influence on an economy’s growth trajectory. For instance, over 60 years ago, heavy industry made up about 30.3% of French economic output whilst services was 46.9%; in 2023, these percentages were 18.7% and 69.2%, respectively.[i] In the UK, manufacturing went from about 17% of economic activity in 1990 to just 9% in 2022 whist services has climbed from 70% to 81% over the same period.[ii] Across the Atlantic, American goods-producing industries’ share of output has fallen from 22.5% in 1997 to 17.0% in 2023, as services-producing industries’ percentage has risen from 64.2% to 71.7%.[iii] Due to their relatively smaller size, industry and manufacturing sectors’ developments aren’t as telling about prospects of services-based economies, in Fisher Investments UK’s review.
Moreover, according to our research, all similarly liquid markets efficiently pre-price widely known information. This means copper, iron ore or aluminum prices don’t reflect developments equities have missed. Take a simplified, illustrative example: a global recession tends to hurt demand broadly, according to our analysis. As one begins forming, investors become less willing to hold equities on the notion weakening conditions will hurt profits whilst builders may anticipate fewer orders so they don’t require as many materials like metals. Or, say a major natural disaster takes a big copper-producing nation’s mines offline for an extended period. That supply disruption may boost copper prices for a stretch. But for global equities, the effect is probably limited. In Fisher Investments UK’s view, that disruption to copper supply likely doesn’t materially influence the factors affecting multinational companies’ profitability over the next 3 – 30 months.
Beyond the theory, though, some recent history illustrates metals prices’ lack of predictiveness. During the global economic expansion from 2009 – 2020, copper prices soared from $2902 per metric ton to $9857 per metric ton between December 2008 – February 2011.[iv] Yet the metal proceeded to fall over for nearly five years as new mines transformed a supply shortage to a supply glut, landing at $4541 per metric ton in January 2016.[v] Throughout that period, the global economy chugged along, unimpeded by copper’s climb or descent.[vi]
In Fisher Investments UK’s review, metals prices don’t reflect any special information other markets may miss – a worthwhile perspective to keep in mind for investors.
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This document constitutes the general views of Fisher Investments UK and should not be regarded as personalised investment or tax advice or a reflection of client performance. No assurances are made that Fisher Investments UK will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Nothing herein is intended to be a recommendation or forecast of market conditions. Rather, it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. In addition, no assurances are made regarding the accuracy of any assumptions made in any illustrations herein. Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.
Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
[i] Source: World Bank, as of 12/9/2024. Statement based on Industry (including construction) and Services as percentage of gross domestic product (GDP), 1960 and 2023. GDP is a government-produced measure of economic output.
[ii] Source: House of Commons Library, as of 31/10/2023. “Industries in the UK.”
[iii] Source: Bureau of Economic Analysis, as of 12/9/2024.
[iv] Source: World Bank and FactSet, as of 12/9/2024. Statement based on world GDP, annual growth, 2009 – 2020, and copper prices ($ per metric ton), monthly, December 2008 – January 2016.
[v] Ibid.
[vi] Ibid.