Commodities price cycles and their interdependence with equity markets

This study examines the time-scale connectedness between returns on nine African stock markets and commodities markets across energy, agriculture, metals, and beverage. First, we examine multi-scale (short-, medium-, and long-run) wavelet structural relationships between African stocks and commodities using the bivariate wavelet coherence. We establish that commodities and African stock returns co-move across multiple scales and co-integrate in the long run, albeit sparse. Second, we analyze the portfolio performance of the African stock markets with other commodities using wavelet-based diversified and undiversified portfolios in a translation-invariant manner to calculate the scale-specific Sharpe ratios over different sub-periods rather than giving a one-shot look for the entire sample. This enables us to examine how risk-adjusted returns vary across different periods. The results confirm that having a combined portfolio of commodities and equities improves performance over different investment horizons. Specifically, we observe that in non-crisis periods, particularly from 2001–2006 the equally weighted and optimally weighted portfolios show the greatest performances. However, as we enter into the crisis zones such as the Asian crisis of 1997–2000 and the global financial and Eurozone debt crisis the risk-aversion of investors become prominent as the risk-minimizing portfolios record the highest performances.