It may be an overlooked fact that the global materials sector is the best performing sector over the last three months (up 8.6%), the second best performer over the last month (up 2.7%) and the third best performer over the last week (up 1.3%). Furthermore, as the MSCI ACWI has corrected by about 2.3% since August 7th, the materials sector is down a mere .7%. In this post we highlight some of the cyclical forces that are both driving materials outperformance and suggesting the global economy may be on modestly better footing for the time being. In all the charts below we compare the relative price of our Knowledge Leader Selection Universe (KLSU) Materials index to the KLSU Developed Market Index depicted by the blue line on the left axis. Our KLSU indexes cover 85% of the market cap of each investable developed and emerging market country.
- Copper, a classic indicator of cyclical momentum, stopped going down in 2016 and has established a strong trend of higher prices, taking the relative performance of materials with it. Chart 1.
- The Baltic Dry Index, which tracks shipping prices, has been recovering since early 2016 and is on the cusp of making multi year highs in price. Materials relative performance is positively correlated with moves in the Baltic Dry Index. Chart 2.
- Cyclically inclined currencies such as the Australian dollar and Canadian dollar have been strong against the USD and appear to be breaking higher, likely driven by demand for products produced by these countries (i.e. raw materials). Charts 3 & 4.
- Even in the United States – where growth has moderated relative to foreign economies – negative economic surprises appear to have bottomed earlier in 2017. The global materials sector should benefit if US economic disappointments continue to moderate. Chart 5.
- Emerging market stocks are outperforming developed market stocks, which is often viewed as an indication of a cyclical upturn in the global economy and positive for cyclical materials companies. Chart 6.