China

China’s extremely high savings rate is the real culprit behind its current economic woes. The authorities have been slow to stimulate the economy, and the risks of “Japanification” have increased. For now, the fact that China is exporting deflation is not such a bad thing. However, if global recession risks were to flare up again, a lethargic Chinese economy would be a cause for concern. Chinese stocks are quite cheap but lack a clear catalyst to move higher. Favor EM markets where earnings and sales estimates have been moving up lately.

The odds of Russia cutting oil output will rise going into 4Q23, as Ukraine’s endgame increases pressure on it, and it actively seeks to undermine President Biden’s re-election. We reckon a 2mm b/d cut would push Brent above $140/bbl by December 2024. This would push inflation and inflation expectations higher and raise the odds of more Fed rate hikes. BCA Commodity & Energy Strategy will remain long the COMT and XOP ETFs. At tonight’s close, we will be getting long December 2024 $100/bbl Brent calls.

The trajectory of China’s infrastructure investment in 2023H2 will be like what occurred in 2021H2. Growth will likely drop from the current nominal 10% to 0-2% in the next six months. China will continue promoting environmentally friendly infrastructure projects that may prevent a contraction in infrastructure investment in 2023H2.

The US is not out of the woods when it comes to inflation, which means that it is too early to conclude that the Fed can stop raising rates. Any further increase in inflation risk would prompt us to turn more cautious on stocks.

Among the critical materials needed for the global energy transition, Li is expected to see the largest increase in demand from 2022 to 2050. Li supply is not constrained, but continued investment in mining and refining will be required to meet increasing demand. We expect strong Li-ion battery demand in the major economies of the world – the EU, US and China – will keep a bid under Li, and allow growing supply to find a home. At tonight’s close we are getting long the LIT ETF, consistent with our view.

Stay cautious on Chinese stocks. Equity investors should use any rebound in onshore stock prices to downgrade A-shares from overweight to neutral within global and EM equity portfolios. Remain underweight Chinese investable/offshore stocks. Onshore bond yields will drop to all-time lows. Continue receiving 10-year swap rates. The currency will continue depreciating versus the US dollar in the coming months.