Base Metals & Iron Ore
The green energy transition will drive a surge in copper demand over a long-term horizon. However, a better entry point to get long will emerge after the next economic downturn begins.
Concerns about the global economy have shifted from sticky inflation to faltering growth. Tight monetary policy is finally starting to bite. We suggest increasing portfolio defensiveness.
Generative AI-related rally resumed in May. Much of the recent market gains are down to excess liquidity that was begotten by the massive pandemic stimulus, creating a dichotomy between multiple economic challenges and exuberant markets. The Fed is unlikely to step in to prevent the bubble as it is currently more worried about the near-term downside for growth than financial stability.
The US economy is in the “Overheating” phase, so stronger growth brings higher inflation. Tight monetary policy means recession is still likely over the next 12 months. Stay defensive.
The death of the Iranian president reinforces our base case view of Middle Eastern instability and at least minor oil supply shocks. Rapid geopolitical developments in recent weeks are pointing to a new bout of global instability. The US is hobbled by its election. Conflicts with Russia, China, and Iran are all now escalating at the same time, at least marginally. Investors should reduce risk and shift to more defensive assets, markets, and sectors.
Q1 Earnings and sales growth were strong, but the devil is in the details: Without the Magnificent Five, earnings growth for the index would have been negative. On a positive note, margins have stabilized, and earnings growth is expected to broaden into yearend. Companies are optimistic about the economy. Development of AI applications is in full swing, but few companies are monetizing them yet. Consumer spending is strong but is slowing. We reiterate our underweight of consumer sectors, and overweight of Software and Services as the “don’t fight AI” adage holds.
The broad market took a significant step backward in April, as market jitters gripped investors, stoking fears of higher for longer monetary policy. However, our roundtable investor poll has demonstrated that the majority remain constructive on equities, and have plenty of cash ready to be invested, which could prolong the rally. Economic data is deteriorating while inflation is stubborn. However, so far, bad news is good news as many believe that a “Fed put” is still on.