Supercycle versus superpower

Last week, China ended its National People’s Congress, at which policy goals for 2021 and milestones for the next five-year plan were revealed. Much of the emphasis in policy addresses was on self-reliance and technical innovation. This is in response to the US designating China a geopolitical rival, and to overcome the country’s still-heavy reliance on the US for key technologies.

The 2021 growth target of 6% is not binding and could be achieved without any sequential growth from here, simply on account of base effects thanks to comparisons with the economic trough last year.

For the first time, though, no growth target was given for the next five years. The absence of binding growth targets is welcome, in our view, as it avoids the temptation of credit-fuelled growth and the leverage and resource misallocation that go along with it.

There will be little fiscal consolidation in 2021, but the authorities reiterated that credit should grow in line with nominal GDP. This implies falling credit growth this year, which we will analyse in more detail in our next Asset Allocation quarterly outlook.

Growth breaking out, or brakes on?

But as multi-asset investors, we also see these developments in China as a headwind for global commodities. Tighter credit conditions in China may not seem too problematic given the expected rebound in global economic growth and positive implications for natural resources.

Indeed, there has even been talk this year of a new commodities supercycle, driven by decarbonisation capex, supply constraints, and synchronised fiscal tailwinds.

Structurally, we agree the macro environment is positive for commodities: the economic reopening should support oil demand, while there has arguably been an underinvestment in oil supply in recent years due to environmental concerns and shareholder pressure on the majors to maintain cash generation today rather than drill for tomorrow.

Commodities have historically also been beneficiaries in an inflationary risk scenarios, which is one potential outcome from the high growth in US money supply we’ve seen and high levels of fiscal stimulus directly to consumers.

We’re also early in the economic cycle, a phase when commodities have tended to perform well from a low base. Commodities have in fact already rallied strongly in the year to date, which is one reason for short-term caution. Indicative of this being a crowded trade already, a recent fund-manager survey from BAML shows that allocations to commodities are now at an all-time high.

Then there is China, which is still central to global commodity demand. And as discussed above, we expect China’s government to hit the economic brakes gently from here.  

Further considerations are that the oil price is heavily determined by OPEC+, making it prone to domestic political decisions where we have no specific edge given our ‘prepare, don’t predict’ mantra, and that our portfolios are already exposed to commodities through equity investments in regions like the UK.

So given these competing headwinds and tailwinds, we recently affirmed our neutral stance on commodities, considering the trends in China in particular potentially too powerful a force to fight.