The global economy is growing, but at a slow pace. Much of the weakness is attributable to the recessions in China and Europe. US economic growth is slowing from Q3’s rapid pace. Much of the weakness is structural in China but cyclical in the US and Europe. The latter two are likely to grow in 2024, but China will probably remain weak. This implies that commodities and emerging markets should be underweighted in global portfolios, in our opinion. Consider the following:
(1) The CRB raw industrials spot price index is down 21% from its most recent peak of 689.0 on April 4, 2022 to 541.4 on December 8, near its lowest level since February 8, 2021. The spot price of copper is included in the CRB index, and it is down 10.5% since January 26 on mounting evidence that China’s property crisis is worsening and weighing on Chinese growth. The price of copper is highly correlated with the China MSCI stock price index, which is down a whopping 56.7% since February 17, 2021 (chart).
(2) The Emerging Markets MSCI (in local currency) is highly correlated with the CRB raw industrials spot price index (in dollars) (chart). Given the lackluster outlook for global economic activity, industrial commodity prices are likely to remain depressed, suggesting not much upside for the Emerging Markets MSCI.
(3) We would remain underweight in the emerging market economies—especially China, even though its stocks look relatively cheap at the current valuation of the China MSCI. On the other hand, India’s MSCI stock price index is at a record high partly because it is a primary beneficiary of China’s woes (chart).
