By Nicholas Dockerty
Investors use fundamental analysis to ascertain the intrinsic value of a financial instrument in the market. It’s about collating data in order to make a decision about what a company or currency is really worth now and what its future prospects are.
For shares this means looking at the performance of a company in fine detail, so that’s sales data, earnings, return on equity and such like. However, even if the analysis of the figures is flawless, a company’s financial figures provide only half the picture. For a really complete analysis the investor must look at external factors too, macroeconomic and political.
A good example of this would be if you were looking at a copper mining company such as Kazakhmys. Now this company might be highly efficient at controlling costs and excellent at maximising sales but if the price of copper falls or rises then its earnings will be affected. Therefore an investor must be aware of what will influence the price of copper in the global marketplace.
Each commodity has its own unique weighting of factors that will influence its price. The price of Gold and the US dollar are very closely linked – investors have been using the relative stability of the former to hedge against a weakness in the price of the latter. Whereas, the price of copper is more susceptible to changes in the cycle of supply and demand in business.
At the moment China is the driving force in the global economic recovery. To sustain its massive growth China needs resources, such as copper, to fuel its manufacturing sector. That’s why we’ve seen copper prices push higher in the last two years.
What has been worrying investors and the Chinese authorities recently is the rise in inflation in China. One way of looking at the causes of inflation is the oversupply of money in the economy caused by rapid growth. A way of decreasing the supply of money is by increasing interest rates in an attempt to slow down the economy.
If the Central Bank of China announces it’s trying to slow down its economy by raising interest rates this will lead to a decline in demand for copper, which means the price of copper will fall and the earnings of companies such as Kazakhmys will too.
Trading CFDs can be an excellent way of taking advantage of what’s happening in the global markets. Whatever your opinion is on how China’s economy, copper and share prices will perform over the next year or so, consider taking a position with IG Markets, the UK’s No.1 CFD provider.
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