Energy
Supply and demand shocks in markets critical to the renewable-energy and defense industries will continue to play havoc with prices, which will negatively impact capex. In the short run, this benefits China given its already-dominant position in these markets. Longer term, investors already are providing capital for long-term projects needed for the energy transition. We remain long the XME ETF, given its low exposure to lithium and nickel holdings.
The Saudi economy is facing internal and external headwinds. The geopolitical conflict is also escalating in the Middle East. EM equity portfolios should stay neutral on Saudi stocks. EM sovereign credit portfolios should upgrade Saudi Arabia from neutral to overweight.
BCA Research presents a limited monthly special series about the Nuclear Renaissance.
A recent slew of macroeconomic data has reassured us that the runway to a recession is longer than many thought. However, that positive realization comes with two caveats. First, the Fed pivot is not imminent, and the magnitude of rate cuts may disappoint. Second, the recession has been delayed but not avoided. Further, geopolitical risk is elevated. We will overweight Tech on the next dip and upgrade Retail to an overweight.
Commodity volatility will continue its rising trend since 2014. The US is on the brink of a major election, the outcome of which could reduce its willingness to engage with the outside world. So, states seeking to carve out their own spheres of influence are incentivized to raise the economic costs to the US and discourage its influence in their regions. These states can do this by interfering in key trading routes in their regions. As a result, geopolitical threats to maritime chokepoints are a structural as well as cyclical problem and will persist due to the revival of superpower competition.
Middle East conflict, extreme US policy uncertainty, Chinese economic slowdown, US-Russian proxy war, and Asian military conflicts do not create a stable investment backdrop for 2024. Our top five “black swan” risks may be highly improbable, but they stem from these underlying trends.
Disinflation coupled with sticky wage growth is likely to result in either a second wave of inflation or layoffs and a recession. In the meantime, market expectations for sales, growth, and margins are overly optimistic and are inconsistent with macroeconomic headwinds. We recommend gradually realigning the portfolio to a more defensive stance.
The risk markets will be surprised by another 1mm b/d increase in crude oil supplies this year or next from the US is low, given the depletion of the unfinished-well inventory that drove shale output higher. Demand remains strong, although growth will slow. Higher non-OPEC 2.0 production, slowing demand growth, lower upside risk and the carryforward of elevated 2023 inventories take our 2024-25 Brent forecasts to $95/bbl and $105/bbl, respectively.