China
An acute shortage of AI hardware will support tech stocks into year-end. However, AI companies may need to ultimately generate $10 trillion per year in revenue to justify their capex. Barring a massive increase in productivity growth, this will be very difficult to achieve. Despite today’s Treasury announcement of upsized buyback operations, bond yields are likely to remain elevated over the coming months. Rising crack spreads have reduced the demand for crude, which is not encouraging for global growth. On the FX front, recent intervention to support the yen will probably be insufficient, but there is significant long-term upside for the currency.
The Hormuz crisis has exposed a structural vulnerability in China's petrochemical value chain. Going forward, Beijing will look to build greater supply security by scaling up coal-to-olefins capacity — a shift that creates a structural tailwind for coal prices and a structural headwind for oil.
Outside semiconductor stocks, EM/China profitability has been well below both their US peers and the levels that prevailed during the EM structural bull market in the 2000s. Over a 3- to 5-year horizon, EM/China relative equity performance versus global will be range-bound.
China does not produce too much. It spends too little. The only viable way for China to reduce investment without raising unemployment is by lowering national savings. Doing so is likely to be politically challenging, however. This suggests that China will suffer from subpar growth and deflationary pressures for the foreseeable future.
Taiwan will not be invaded soon but focus on external constraints, not internal. Strongmen or “visionary” leaders can override geopolitical constraints at critical junctures, at least initially.
