Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
China’s role in helping drag the global economy out of the financial crisis-caused recession is underdiscussed. In a similar vein, Morgan Stanley economist Robin Xing reports on how beneficial a recovery in the Chinese economy can be this time,
“Surging food and energy prices alongside increasingly aggressive monetary policy tightening all point to a massive slowdown in DM economies and a global economy on the brink of recession. Investors’ attention will necessarily turn to China, perhaps in the hopes that it can once again buoy global growth as it did after the global financial crisis. Such optimism should be tempered as China’s economy is in a fragile condition, and we forecast below-consensus 2.8%Y GDP growth this year. We look for only a modest rebound to 5.2%Y in 2023 as Beijing gradually alleviates the housing and Covid overhangs … Any rebound will depend on policy, and the policy mandate remains focused on job market stability. To date, we have seen a resumption in monetary policy easing, incremental support for the real estate sector, and additional infrastructure spending. But these steps have garnered little traction because of housing developers’ liquidity challenges and lingering Covid restrictions”
“MS says don’t expect a big eco boost from China recovery” – (research excerpt) Twitter
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RBC energy analyst Michael Tran surveys clients to gauge a sentiment-driven oil market (my emphasis),
“‘This is a sentiment driven market that is completely disconnected from fundamentals. Prices have been trading lower on bad news, on good news and on no news.’ That’s a comment from a commodity client that we think sums up the way that investors have felt about energy over recent weeks. Commodity traders remain cautiously optimistic on the fundamental outlook. Many were caught overly bullish when the tape turned this summer and while the risk-reward profile looks attractive, few are compelled to force risk, currently. The fear remains greater than the greed … Macro accounts peeled out of their energy positions after renting the oil trade earlier this year. Energy is a bonafide inflation hedge, but the rental trade was liquidated as inflation fears grew into recessionary fears … We have highlighted that spot WTI [futures] contract liquidity has been off by more than 40% through the summer and investor positioning has fled to running multi-year low risk, resulting in volatile oil prices”
“”fear remains greater than greed” in oil markets (RBC)” – (research excerpt) Twitter
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Citi analyst Ephrem Ravi sees mining stocks as deeply discounted,
“The market continues to price in lower commodity prices into the mining equities. On our estimates, the stocks are pricing in an average of 32% lower prices relative to spot. This compares with 46% lower prices factored into stocks a year ago and reflects a re-rating in mining equities since then as the valuation discount has narrowed. Within the sector, Glencore is pricing in 42% lower prices as elevated coal prices keep NPV [net present value] valuation high while the market struggles in taking a view on normalized and sustainable coal prices … We remain of the view that the valuations remain undemanding and the valuation discounts should narrow even further, possibly around year-end when positive seasonality effect kicks in although we would flag that risks surrounding the sector continue to remain in place and we would therefore be selective within the sector … we expect global metal consumption rebounded to low single-digit growth in August with the Citi Global Copper End-use Tracker rising ~2% y/y compared to broadly flat in July. However, we expect this to be something of a false dawn as metal consumption should decline driven by a Europe-led downturn in the months ahead”
“Citi sees mining stocks as deeply discounted” – (research excerpt) Twitter
See also: “Why - and when - I’m planning to buy a copper stock” – Inside the Market
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Diversion: “Poor Dental Health Linked to Greater Dementia Risk, Large Review Finds” – Gizmodo
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Scott Barlow