This week I thought I might venture globally and look at China, Africa SSA ex SA) and the world oil market. Let’s start by reminding readers that the Chinese People’s Congress has held its annual meeting. A veritable hotspot of legislative debate and blue sky thinking (shurely shome mistake, ed), it served to remind investors that not everything should be viewed through the prims of TrumpVision. What goes on inside China and how it affects its neighbors is arguably as important as the bilateral shenanigans between China and the US.
DWS put out a note last week that reminded investors that although China is still running a current account deficit, it may not be for much longer. Even more shockingly China is also often the subject of unfair trade practices.
The chart below looks at the country by country trade position. This shows that China is running a big trade deficit with quite a few countries most notably some countries in Eastern Asia, commodity exporters, but also with Germany and Japan. On the other hand, China keeps running a substantial surplus with many industrialized countries, most notably with the United States. For 2018 it reached a record high of 419.2 billion dollars.* “Surely”, DWS observes, “not the kind of news the U.S. president is likely to cheer about, given the fact that the United States has hit a total record deficit in trade of 891.3 billion dollars in the middle of his term of office – 2018.”
My own thought is that if China was to be forced to drastically cut back its surplus with the USA (quite how and for what length of time is anyone’s wild guess), it might turn the tables on its peers and demand they get their act together. Taiwan, Korea, Brazil, and Japan may be the knock victims of the great Trump squeeze.
* This number comes from the U.S. commerce department and includes ex-/ imports to Hong Kong. The chart relies on data from the Customs General Administration of China that do not include ex-/ imports as they are treated as domestic trade.
One region that may be a particularly vulnerable victim of the Trump squeeze vis a vis China, is Africa. Its commodity exporters – notably South Africa – might start feeling even more pain fairly soon. Surely that might spook frontier market investors as we head into 2019? Apparently not. London based independent researcher Christopher Hartland-Peel runs a regular slide rule over the top 30 listed businesses in Sub-Sahara Africa ex SA by market capitalization. His latest numbers suggest that market cap of these Top 30 for February 2019 was US$56.3bn up 4.1% on January 2018 and 5.3% year to date.
In February 2019 SSA ex SA stock markets overall rose 2.5% in US$ terms and 3.4% year to date (page 5).
Some other interesting stats on Africa from his report
- Zimbabwe rose 19% on currency effects.
- Eight stock markets on the continent have positive US$ returns year to date
- Many of the big African listed businesses are dirt cheap. According to Hartland Peel, 8 companies have a ROE > 25%. 12 companies have a trailing P/E < 10.0 times, another 12 companies have a dividend yield > 5% and 9 companies trade on a price/book value < 1.50 times.
And oil…..what next ?
Last but no means least French bank SocGen have just released their latest oil markets special report. Nothing terribly surprising in the weighty tome with a cautious, bearish outlook in the first half of the year then turning more bullish in H2. Target prices? Brent $60/$62. 3Q/4Q19: Brent $65/$70. Annual 2019: Brent $64.
The report does helpfully run a checklist of upside and downside risks – pasted in below.
“ US oil sanctions on Iran: when the next six-month phase begins in early May, the US could severely tighten/reduce allowable Iranian crude exports, using the mechanism of sanctions waivers for importers; this could happen if prices are relatively low and markets are perceived to be well-supplied. The US does not want sharply higher prices, but they could get it wrong and over-tighten at the wrong time, just ahead of peak summer crude and product demand. $10 crude price impact.
US oil sanctions on Venezuela: starting on 28 April, non-US companies will not be able to transact with PDVSA in US dollars. The US could reduce flows further by imposing secondary sanctions on non-US companies/countries, banning them from using the US financial system (similar to oil sanctions on Iran). $5-10 crude price impact.
Big picture: The US has a new policy lever to adjust Iranian and Venezuelan flows, with a potentially large impact on supply and price. A new – and complicating – factor for oil markets. Why does the White House feel comfortable using oil sanctions? Shale oil. The US price target is lower than the Saudis. The level of future coordination between the US and the Saudis is not clear. From a Saudi perspective, last autumn (when they increased output at the request of the US) did not work out well at all.
Investor flows: could provide pronounced uplift; current managed money positioning is extremely oversold (net length is near the bottom of the range). This means that the price risks are strongly to the upside. $10 crude price impact.
Key downside risks include the following:
The health of the global economy and global oil demand.
OPEC+ cuts: we assume strong compliance with the cuts, and further project they will be extended through all of 2019 (possibly with adjusted output targets). If OPEC+ supply management is less effective than expected, or if the cuts are not extended, there is downside. $10 crude price impact.
Other Wildcards (both upside and downside risks)
US shale production growth could be slower (bullish) or faster (bearish) than expected. $5-10 crude price impact.
IMO 2020 could result in a bigger (bullish) or smaller (bearish) impact on distillate demand than expected. Refineries may find it more difficult (bullish) or less difficult (bearish) to supply the necessary incremental distillate. $5 crude price impact.