China's growth in 2021, metals and the opportunities
Javier Castillo Guillén | Jan 29, 2021 11:43
Copper is the second most important industrial metal on the planet. According to International Monetary Fund (IMF) data, most of the production generally comes from countries such as Chile, Peru or China. Despite being one of the countries with the highest production, China is also the world's largest importer, hitting a new import record in 2020. China is followed by countries such as the United States or Germany.
It is a fact, there is exists a relationship in where the greater the demand and use of metals, the greater the growth in the GDP of the Asian country. I share with you a graph obtained by the IMF, which correlates both indicators. Despite being updated until 2014, it shows a very visible relationship that continues to this day.
This circumstance suggests, the behaviour of this asset may have a great correlation in the performance of the Chinese economy and in the behaviour of its indices. The main idea of this article is to begin to compare this concept, to see what potential context may appear and how to start monitoring it in order to take advantage of these potential movements.
The analysis that we are going to carry out in this particular article is about the interrelation between the behaviour of copper, China's GDP, the Shanghai Composite and companies in the sector. This comparison will allow us to go deeper into potential investment opportunities in this sector related to the current economical context.
As we say, it is convenient to contextualize the analysis. First, we will look at the growth estimates for the coming years recently updated by the IMF. As we have seen previously, the higher GDP growth, the higher the use of metals. The growth data show a potential rise in the Chinese economy much higher than that of the rest of the developed economies for 2021. To make the comparison easier and more visual, we will see the following graph.
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Undoubtedly, this fact leads us to the conclusion that the performance of the Chinese index must have, a priori, a favourable behaviour for the next months-years. Here you can see the current market situation.
Next, we have to determine what behaviour our main asset is having. To do this, we will use a medium-long-term vision in order to contextualize the current moment. Like most commodities, mainly agricultural and industrial metals, the behaviour has been tremendously bullish in recent weeks. This will definitely have an impact on the productive economy that is yet to be determined in the medium term. The growth of agricultural commodities will also have an impact. However, let's focus on the current analysis.
In a medium-term view over the weekly chart, at a technical level we can see the copper shows a very bullish behaviour mainly due to two key circumstances. In the first place, the fact breaking the long-term downtrend upwards. Second, the breaking of the resistance zone what had been acting as top level since 2012. This fact suggests a small digestion of the price (potentially accompanied by indicators such as RSI), which could lead it to consolidate in the 7000 point zone before to resume the climb to the next levels. In a more severe correction, it could go for the previous trend line test again. This of course, in the event of a correction. If not, you can look for a new high area, which for our asset would be in the area of around 8500-8600 points.
Once we have observed the GDP with its growth expectations, its implication with the use of metals and an index, let's move on to the comparisons. If we use the graph the Shanghai Composite Index, any company that is dedicated to the sector * (Taseko Mines in this case, but it is a general behaviuor), and the price of copper, we can see the behaviour of these three assets has great correlations. Therefore, a similar behaviour can be expected in all of them over the next period.
* As always, it must be take into account that comparisons with private companies are subject to specific circumstances regarding their performance and can distort the price, speed it up or slow it down.
Of course, these comparisons give us an indication and a potential movement, which like everything in the market, cannot be guaranteed. However, the depth of the study we carry out on our analysis increases, adding some more information than the purely technical or fundamental scope. Therefore we include a contextual or economic circumstance, so important in the evaluation of commodities.
Due to all these circumstances, we can conclude that we are facing a great opportunity to review industrial commodities, the Chinese economy or the companies that perform favourably under these circumstances regarding the expectations on macroeconomic context. This fact will allow us to broaden our horizon when selecting assets, markets or opportunities.
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