Diageo’s (LSE: DGE) first-half results, released last week, impressed the market and sent the company’s shares to a 52-week high following the news.
However, upon closer inspection, Diageo’s results revealed a worrying underlying trend that could signal trouble ahead.
Bellwether
You see, Diageo is a bellwether for global consumer confidence. When consumers are confident about the state of the economy, they spend more money on luxury goods, in this case, Johnnie Walker scotch or Smirnoff vodka. However, when consumers are feeling downbeat about their prospects, they seek out the cheaper, unbranded products.
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Unfortunately, consumers seem to be moving away from the premium brands. This could be due to a number of factors. However, when you also take into account the falling price of key commodities, such as copper –another bellwether for economic health — it’s easy to conclude that the global economic outlook is darkening.
Indeed, Diageo reported that first-half sales of Johnnie Walker fell 14%, adjusted for forex while sales of Smirnoff vodka dropped 7%. These sales declines are concerning. Sales of premium products, such as Johnnie Walker and Diego’s Captain Morgan rum, should increase in line with economic growth. It seems that consumers are now trying to spend less on the good things in life.
Diageo’s falling sales are not just bad news for the company — profits fell 1% excluding forex during the first half — they are also bad news for the FTSE 100.
Global index
The FTSE 100 is a truly global index. Around 77% of FTSE 100 revenues come outside of UK. So, if the global economy starts to stutter, the FTSE 100 will take a hit.
Diageo’s falling sales could indicate that the global economy is not as strong as many think and there’s one other factor that supports this conclusion.
Copper has a reputation for its ability to predict turning points in the global economy. Copper is used in almost all industries so high demand, or increasing economic output, usually pushes the price of the base metal higher.
However, a lack of demand and falling prices may indicate an economic slowdown.
The bad news is that the price of copper has recently crashed to a low not seen since the financial crisis. For the FTSE 100 this is really bad news. Collapsing commodity prices and a falling demand for consumer goods, signal that global economic growth could be slowing.
For a global stock market index that’s highly exposed to the commodity sector, it looks as if the FTSE 100 is heading fro trouble.
