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.
China’s reopening faltered and now it is applying moderate stimulus. OPEC 2.0’s production discipline is getting results, with oil prices climbing. The Fed will not be able to deliver dovish surprises in Q4 2023. Investors should expect stock market and commodity volatility and prefer defensive positioning.
The Chinese economy will not recover without significant “irrigation-style” stimulus. The latter is still unlikely for the time being. Dim economic fundamentals justify lower valuations of Chinese equities. Lingering deflationary pressures entail even lower interest rates, which is bearish for the RMB.
While we are sympathetic to the view that the Fed could temporarily achieve a soft landing, we are skeptical that it could stick that landing for very long. Stocks could strengthen into year-end, with small caps potentially leading the charge. But the rally will fizzle out next year as the global economy begins to sink into recession.
While Chinese stocks have low valuations and are oversold, their attractiveness is dampened by uncertainties in the magnitude of stimulus and the dismal outlook for corporate profits in the next six to nine months.
