Home >market >mark-to-market >The divergence between equities and commodity prices

Commodity prices and equities have seen more or less co-ordinated moves in the last five years. In recent months, however, that relation has broken down. Both the MSCI World index and the MSCI Asia-Pacific ex-Japan index have moved sharply higher, while commodity prices, as shown by the Reuters CRB index, have remained almost stagnant.

What could be behind this? Could it be worries about China? But Chinese equities too have moved up in the last six months and the fundamentals are looking up, with the HSBC China PMI data showing output increasing for the past five months. The January survey of global fund managers by Bank of America-Merrill Lynch provides a clue. The survey showed that while a net 51% of investors are overweight equities relative to their benchmarks, investors remain underweight commodities.

This divergence is unlikely to continue. If the global economy recovers, commodity prices will head north. If it doesn’t, equities will head south.

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