Commodities & Energy Sector
Energy markets are balanced in the short run, which keeps our Brent price forecasts at $95/bbl and $105/bbl in 2024 and 2025. Structurally, we see an upward bias to inflation, as geoeconomic fragmentation fundamentally alters supply chains; higher costs follow. Military access to oil will be prioritized. Renewables are the future, but war will be fought with hydrocarbons. We remain long the COMT, XOP and PPA ETFs.
We created a sector selection scorecard based on performance of sectors under various macroeconomic regimes while taking into consideration revisions to expected earnings growth and valuations in a historical context. Our total sector selection scorecard suggests overweighting defensives such as Utilities, and Consumer Staples, and underweighting cyclicals such as Consumer Discretionary, Industrials, and Financials. Considering this analysis, we have adjusted our sector positioning accordingly.
Supply and demand shocks in markets critical to the renewable-energy and defense industries will continue to play havoc with prices, which will negatively impact capex. In the short run, this benefits China given its already-dominant position in these markets. Longer term, investors already are providing capital for long-term projects needed for the energy transition. We remain long the XME ETF, given its low exposure to lithium and nickel holdings.
The disinflation to date has been benign because it has come almost entirely from improving supply. But the supply-side tailwind has exhausted, so the last mile of the journey to 2 percent inflation will be the hardest, especially in the US and the UK. We discuss the investment implications. Plus, we highlight an interesting sector pair-trade.
Indonesia will not revert to dictatorship. Yet the guardrails against authoritarianism are also constraining the actions of the next government in tackling near term domestic and regional challenges. For long-term positioning, use potential selloff from a “dictatorship scare” to build position as structural outlook for Indonesia is positive due to the China-West divorce and the global energy transition.
The Saudi economy is facing internal and external headwinds. The geopolitical conflict is also escalating in the Middle East. EM equity portfolios should stay neutral on Saudi stocks. EM sovereign credit portfolios should upgrade Saudi Arabia from neutral to overweight.