Asia
As global financial institutions like the IMF draw attention to the real-estate crisis in China, the CCP will be forced to step up regulatory and restructuring efforts to contain its spread and limit further contagion domestically and globally. The Party also will be forced to deliver stronger fiscal- and monetary-policy support to beleaguered banks and developers. We expect it to do so, which keeps us bullish energy and metals. Failure raises the odds of a collapse in the property markets, which would be socially destabilizing, and lead to greater risk aversion and volatility globally.
India’s intake of industrial commodities is 10-to-20 times as small as China’s. Capital goods are five times as small. Hence, India is not in a position to offset any decline in Chinese demand for these commodities and goods.
Aggressive monetary tightening has always led to recession, although the timing is uncertain. The effects of high interest rates are starting to be felt. Investors should stay risk off and buy government bonds as a safe haven investment with carry.
China’s oil demand growth will moderate to a still robust 4%-6% in the next six-to-nine months. We recommend that investors in China’s onshore and offshore stock indexes overweight energy producers.
US fiscal, monetary, and foreign policies are unlikely to deliver any dovish surprises for investors in Q4, due to the impending government shutdown, persistent inflation, and instability among OPEC+ and China.
We continue to expect Brent crude to trade just above $101/bbl in 4Q23, and to average $118/bbl in 2024. Higher volatility looms. We expect Russia will cut oil production next year as part of a concerted effort to undermine Biden’s re-election. Oil-demand volatility is set to rise in response to divergent policy imperatives. We continue to favor equity exposure to oil and gas via the XOP ETF; direct exposure via the COMT ETF, and long Dec23 $100/bbl Brent calls. We are getting long Jan-Feb-Mar 2024 Brent futures vs. short the same months in 2025 expecting steeper backwardation as inventories draw and markets tighten.