Fiscal Policy
Momentum, high cash balances, FOMO, and expectations of soft landing drive the market higher. This rally may continue for a while, but macroeconomic headwinds are intensifying and will eventually derail the rally. It is too early to celebrate victory.
Assuming yesterday’s policy rate hike is a sign that Turkey is finally veering towards orthodox economic policies; should investors rush in?
We are strategically bullish on the outlook of the energy sector. Domestic and external political constraints asserted themselves, restraining the most negative impulse against this sector by the Biden administration. Go long energy versus cyclicals (ex-tech).
China is facing a risk of deflation. Marginal interest rate cuts and targeted stimulus will be insufficient to boost China’s growth given the current deflationary mindset and the danger is that the economy may be entering a liquidity trap. Deflation is bullish for government bonds, but negative for equity prices. Chinese share prices will continue to decline.
The normalization of oil storage markets in the Northern Hemisphere; strong demand, aided by China stimulus this year; and continued production discipline supports our view Brent prices likely have bottomed, and will move higher from here. We raised our 2023 Brent forecast $2/bbl to $92/bbl. Our forecast for next year is revised upward by $5/bbl to $120/bbl. Price risk remains to the upside, particularly if KSA exercises its option to extend production cuts of 1mm b/d.
The CCP is poised to roll out a re-boot of China’s economy that will focus on its comparative advantage in the processing of base metals – particularly copper – and the export of metals-intensive products like EVs. The re-boot will emphasize deeper policy coordination to revive construction, manufacturing, exports and renewed efforts to attract and retain FDI. This will be bullish for commodities – particularly conventional energy and metals – as funding flows to SOEs.
We expect the CCP to pivot toward more fiscal stimulus – and less credit stimulus – this year, which will put a bid under energy and metals prices. On the back of this view, at tonight’s close we are getting long 4Q23 Brent futures vs short 4Q24 futures, and re-establishing our XME and PICK ETF positions expecting higher prices and steeper backwardations in metals markets. We also are getting long 4Q23 COMEX copper vs short 4Q24 futures.
Indian EPS growth is set for major disappointments vis-à-vis the lofty expectations. Weak domestic demand amid tight fiscal and monetary policy entails more downside in stock prices. Stay underweight.