By Peet Serfontein
Market capitalisation, commonly referred to as market cap, is the total value ascribed to a company by the market - providing insight into its absolute size. This metric is used to categorise equities into large-cap, mid-cap, and small-cap tiers, each offering distinct advantages, growth prospects, and risk profiles.
Commodities as economic indicators
Commodity prices are widely seen as leading indicators of economic activity. For instance, rising oil prices often reflect the expectation of demand for energy rising because of better economic activity, while declines may signal weakening demand conditions. Copper is often referred to as 'Dr Copper' as its price usually reflects global economic health. This is because of its broad use in construction, electronics, technology and infrastructure. Platinum prices can also be an important indicator of industrial performance, particularly in automotive and manufacturing. The price tends to rise with robust car sales and industrial output, but weak economic activity can impact demand for the end product and may therefore dampen prices.
Equity markets often react to these commodity price trends. For example, rising commodity prices may directly imply stronger earnings for resource producers and indirectly signal an improvement in economic activity that will lift company prospects more broadly. This is not always clearcut, however, as rising commodity prices can also translate in higher input costs which can pressure margins and ultimately, profitability.
Impact on South African markets
South Africa's equity market is closely tied to commodity prices, given the Johannesburg Stock Exchange's (JSE) heavy weighting toward the resources sector (~34%). Rising prices for commodities such as platinum group metals (PGMs), gold, coal, and iron ore, typically boost earnings for these firms, lifting the broader market. Conversely, commodity downturns can drag on the local bourse, as resource exports underpin corporate profits and can even have a knock-on impact on tax revenues, and economic growth. For this reason, the rand often behaves as a “commodity currency,” strengthening with rising prices, which supports investor sentiment and equity performance, and weakening when prices fall.
Market rotation
Commodity cycles often trigger market rotations as investors shift capital from resource-heavy to consumption-driven stocks, and vice versa. The cyclical impact on equities is uneven, creating sector-specific winners and losers:
Inflation and interest rates
One of the strongest links between commodities and equities is through inflation. Rising prices, especially in energy and food, feed almost directly into headline inflation. High inflation can prompt central banks to raise interest rates, which typically weighs on equity valuations (higher borrowing costs and higher valuation 'discount' rates). Conversely, when commodity prices are stable or falling, inflationary pressures ease, interest rates can decline and savings pools may increase, giving equities room to rally. Commodities thus serve as a vital bridge between real economic activity and financial market conditions.
Commodities as safe havens
Not all commodities move in tandem with economic growth. Gold often (but not always) rises when equities fall, acting as a safe-haven asset during periods of market uncertainty. This reflects investor behaviour shifting from riskier assets (equities) to perceived stores of value (gold).
Practical takeaways for investors
Understanding how shifts in commodity cycles affect inflation, interest rates, and sector performance enables investors to position their investments more effectively and manage risk with greater confidence.
