What Would Underperformance in Construction & Farm Machinery Stocks Imply for Other Asset Classes and the Economy?January 23, 2014
Yesterday we highlighted here the weak technical chart patterns developing for most stocks in the Construction & Farm Machinery sub-industry that seem to be telegraphing further underperformance for the group. Today we’d like to take a look at the group as a whole and see what more underperformance might portend for related variables.
In the first chart below we plot the price in USD of the MSCI World Construction & Farm Machinery & Heavy Trucks sub-industry relative to the MSCI World Index (blue line, left axis) against the price of copper (red line, right axis). A few things pop out on this chart. First, the Construction & Farm Machinery index has been underperforming the MSCI World Index since the beginning of 2011. Second, that relative underperformance is closely related to the price of copper, a widely used tool to gauge the pace of global growth and pricing pressure. Therefore, more underperformance of the Construction & Farm Machinery stocks would probably coincide with more weakness in the price of copper and might cause investors to give a second thought to the accelerating global growth thesis.
This next chart plots the relative performance of the Construction & Farm Machinery index (blue line, left axis) against the MSCI Emerging Markets index (red line, right axis). Comparing these two variables makes intuitive sense since EMs are the largest marginal buyer of construction equipment and rely heavily on fixed asset investment for growth. The two series have been closely related since 2009 and tell us that we should expect further weakness in EM stocks if Construction & Farm Machinery stocks continue to underperform as we expect.
The final chart we’ll post compares Construction & Farm Machinery index (blue line, left axis) to producer prices in the US (red line, right axis). This chart hints that more underperformance for this economically sensitive group should mean pricing pressure in at least the US will remain subdued.