Energy
Europe’s domestic economy continues to surprise to the upside, can small-cap stocks do the same?
In Section I, we explain why we do not see the deceleration in US inflation, the likely near-term pickup in European growth, and the end of China’s dynamic zero-COVID policy as signs of a sustainable rebound in global economic activity over the coming 6-12 months. The key question is not whether inflation will fall back to central bank targets, but rather how quickly this will occur. For now, our indicators point to slower but still elevated inflation this year. In Section II, we explore what it will take for the Fed to cut interest rates, and note that nonrecessionary rate cuts are possible but not especially likely.
China’s re-opening – powered by the fiscal and monetary stimulus required to achieve at least 5% real GDP growth after flattish 2022 growth – and a weaker USD will catalyze demand growth this year and next, lifting global oil consumption by close to 2mm and 1.7mm b/d in 2023 and 2024. We lowered our Brent forecast slightly for this year to $110/bbl, and expect 2024 prices to average $115/bbl. WTI will trade $4-$6/bbl lower.
In response to lower energy prices and China’s reopening, European assets prices are outperforming. Will the ECB spoil the party?
Relative to beaten-down expectations, global growth will surprise on the upside in 2023. Investors should overweight equities for now but look to turn more defensive in the second half of the year.
The European Commission risks retarding the development of long-term contracting for renewable energy just as momentum is building. Policy uncertainty will continue to dog firms and households in the EU, if the Commission's attempts to lower energy costs for consumers at the expense of renewable-energy producers by extending “windfall profits taxes” and mandated lower costs succeed. Such measures will lower producers’ revenues, which will translate into lower renewables investment.
Slowing growth would be bad for equities, but so would stronger growth since it would mean more rate hikes.
In Section I, we note that the global growth outlook has modestly deteriorated over the past month, despite an improving 12-month outlook for Chinese domestic demand in response to the imminent end of the nation’s “dynamic zero-COVID” policy. Investors should remain conservatively positioned over the coming year, as we recommended in our Annual Outlook report. In Section II, we examine whether the structural risks facing global stocks are higher or lower today than they were prior to the global financial crisis, and what that implies for stock and bond risk premia.
Energy and metal supplies are becoming increasingly scarce. In such a market, we will re-establish our long commodity exposure via the COMT ETF after being stopped out with a -4% return this week. We remain long equity exposure to oil and gas producers, and metals miners via the XOP and XME ETFs, respectively. Our energy recommendations closed this year posted an average 18.4% gain.
We explore the eight major themes that will define economic and market trends for Europe next year.