Vedanta can offer diversification, but what about ethical concerns?

Vedanta can offer diversification, but what about ethical concerns?

Article updated: 16 April 2018 10:00am Author: Michael Baxter

Diversification matters. But what’s really important is getting non-correlation, having a portfolio made up of stocks that do not rise and fall in tandem.

And that takes me to commodities and the economic cycle and what happened to the Vedanta share price between the end of 2008 and 2010.

The cycle and commodities

What’s good for commodities can be bad for the economy. It all boils down to the interaction of demand and supply, and time lags. When the economy is buoyant, demand for commodities increases, and with that we get higher commodity prices and a surge in investment.

In time, this hurts. Higher commodity prices can lead to a pick-up in inflation, leading to higher interest rates. Then the economy starts to slow, recession beckons, and demand for commodities fall, their price drops, investment falls and the commodity cycle begins again.

It’s the time lags that count. Cheap commodity prices hurt the commodity companies, but boost the economy, supporting companies that produce consumer products. And vice versa when commodity prices are high.

In short, commodity stocks offer a pretty good way to get non-correlation - stocks that can do well when all around there is darkness.

The stock market experienced troubled times during the 18 months or so after 2008. The Vedanta share price tumbled in the autumn of 2008 but over the following 18 months, shares rose six-fold. It was a time of trouble and Vedanta soared.

The bigger picture

Then again, in April 2010, as the stock market began its slow recovery, the Vedanta share price crashed. And when you pull back and look at the share price performance over time, the picture that emerges is not so pretty. Shares have fallen by around a third over the last five years. Mind you, if you had bought into the company in 2004, when it was floated, you would have doubled your money.

Timing is key. The economy is enjoying a good spell, stock markets have been rising, Vedanta’s shares have not been so strong. It maybe that this is set to flip.

The business

Vedanta Resources Plc is listed on the London Stock Exchange. It’s principle shareholder is the Indian billionaire Anil Agarwal, who owns 61 per cent of the company. It is a metals and mining company, the largest mining and non-ferrous metals company in India, but also has operations in Australia and Zambia.

It has just published its latest production release. Highlights include record production of refined zinc in its Zinc India division and record annual production of aluminium.

The company is projecting constrained global supply of zinc

Mr Agarwal told Reuters: “It is very difficult to find zinc deposits.” He said that demand for zinc should rise in part because it is used to galvanize steel against rust, but also has applications in pharmaceuticals.

Meanwhile, sanctions against Russia have led to surging aluminium prices. I find it hard to be positive about the deterioration in relations between Russia and the West, except in the one respect, commodity producers such as Vedanta may benefit.

Ethical concerns

Some investors, however, may baulk over ethical concerns. The Church of England divested from the company in 2010 over such concerns. Today, there are mass protests by the people of Tamil Nadu over the company’s copper smelting in the region. The company has been hit by a court order in India to stop mining iron ore in Goa.

Diversification

And that may be the crux of this one. The big plus is potential non-correlation. But even if you can satisfy yourself that this is a positive, you may think that the ethical issues need to be considered too.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.