Commodities & Energy Sector
The odds of achieving a goldilocks scenario in the US where inflation drops amidst robust growth are low. If US bank woes do not escalate, the Fed will continue hiking amid a contraction in US corporate profits and global trade. The recovery in China’s industrial economy will disappoint. Commodity prices are breaking down.
Bank failures are another ‘canary in the coal mine’ warning that a US recession is imminent, yet stocks, bonds, and the oil price are still a long way from fully pricing it.
The development of trading blocs and the rise of economic warfare will lead to the inefficient allocation of resources. Higher fiscal outlays and tight commodity supplies will feed into energy prices driving headline inflation. It also will drive demand for inventories as hedges against supply volatility globally higher. We remain long equity exposure via ETFs to oil and gas producers, and metals miners. We also retain our exposure to commodities via the COMT ETF.
The Chilean economy is entering a recession. Inflation will drop rapidly and the central bank will cut rates meaningfully in H2 2023. We continue to recommend a structural overweight across Chilean risk assets on the basis of falling inflation and local yields, record cheap valuations, and dissipated political volatility.
Central Banks remain in thrall to the mistaken impression that backwardated oil futures markets are signaling lower headline inflation over the next 2-3 years. This is not the signal the markets are sending: Backwardation is an indication inventories are being drawn down to cover a physical supply deficit brought about by strong demand. We remain long broad equity-market exposure to energy producers via the XOP ETF, and to outright commodity exposure (and backwardation) via the COMT ETF.
China’s housing market adjustment will be protracted, causing several years of sub-par growth in the world’s second largest economy. We go through the major investment implications.
Global demand for new energy vehicles (NEVs) remains in a long-term uptrend, propelled by falling battery prices, improved driving range and an upgraded charging infrastructure. That said, diminishing policy support in China and Europe will spark a drop in the growth rate of global NEV sales to about 35% this year, down from about 60% last year. Global NEV-related stocks are likely to rise on a structural basis, but we recommend that investors wait for a better entry point given that valuations remain high.