Investment Comment
8th September 2023
Crumbling property and higher oil prices…not just a UK problem
After a long-wet summer, glorious UK weather this week marked the return to school for children, unless their school was closed due to the threat of collapse. The Chinese property sector appears to be in a similar state of disrepair and is slowly crumbling.
China’s post-Covid economic rebound has disappointed. The property sector appears to be over-burdened with debt, with companies unable to make their interest payments. In addition, global economic weakness has resulted in lacklustre export growth. Historically, when China had weak economic growth the government provided significant fiscal and monetary stimulus to energise the economy but has failed to do so with the same vigour in 2023, which has led to poor investment returns this year.
This may reflect a longer-term change of policy from the Chinese government, to move away from a debt fuelled economy built on property with low subsequent returns. The areas of the Chinese economy that are quickly growing such as electric vehicles, batteries and solar panels are where access and control of the commodity supply chain have propelled China to market leading positions in these growing sectors. The growth in these ‘new green economy’ sectors has been offset by the collapse in the property sector leaving the overall 5% economic growth target for China at risk. The disappointment around economic growth has seen Chinese equities fall by 20% post the Covid reopening rally.
Whilst old-fashioned bold stimulus cannot be ruled out in the face of soaring youth unemployment (reportedly 20%), investors may have to adjust their longer-term expectations around Chinese economic growth. In addition, the Chinese currency (Renminbi) has weakened, falling back to the 2022 lows against the US Dollar. Both stocks and credit now look very cheap after having suffered material drawdowns. Periods of extremely negative sentiment on the Chinese economy have often been followed by strong forward returns for stocks. The risk of continued deterioration in the Chinese economy that may lead to continued underperformance in domestic risk assets must be balanced against the potential for additional policy support that fuels a squeeze higher. Weaker growth in China has been felt in the European economy, which has reported much lower than expected growth over the past few months.
Oil price on the rise
Oddly, against a backdrop of slowing economic growth in China and Europe, oil prices have risen sharply (by around 20%) in the past few months. Saudi Arabia and Russia prolonged their oil supply curbs by another three months, a more aggressive move than traders had been expecting as the OPEC+ members seek to support a fragile global market. Saudi Arabia will continue its production cutback of 1 million barrels a day and hold output at about 9 million barrels a day — the lowest level in several years. Russia’s export reduction of 300,000 barrels a day will be extended for the same duration. These reductions, which amount to around 1% of global production may not seem much, but against the expected growth in demand of 2.3 million barrels a day in 2023 (OPEC August 2023 report) marginal shifts in supply are meaningful for prices.
Higher oil prices means that the falling prices of the first half of 2023 are over and are instead rising once again. This could dent consumer confidence and sap spending power. As inflation has fallen over recent months, incomes faced the prospect of recovering in real terms going into 2024, but high oil prices may delay that upside surprise. Whilst oil related inflation may not prompt further monetary tightening from Central Banks, higher oil prices tend to act as a drag on economic growth. We may well see headline inflation data tick up over coming weeks, having been falling for the past 6 months.
One of the reasons for lower oil prices through 2022 and the start of 2023 has been the willingness of the US government to release oil into the market from its Strategic Petroleum Reserve. Historically oil from the reserve has been released into the economy in the face of challenges, such as hurricanes, to quell market instability. The 300,000 barrels of oil released since mid- 2021 is likely to have contributed to the falling oil price. The US government has pledged to rebuild the stockpile and this additional demand may result in higher oil prices especially against the back-drop of supply cuts from Saudi Arabia and Russia.
Oil prices have climbed over recent weeks to year highs, resulting in a less deflationary backdrop from commodity prices
Source: Artorius, Bloomberg
Strategic Petroleum Reserve stocks (in the US) have been run down over the past three years to multi-decade lows
Source: Artorius, Bloomberg
All expressions of opinion reflect the judgment of Artorius at 8th September 2023 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions. Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority. Artorius is a trading name of Artorius Wealth Management Limited.
FP20230908001