Alternatives

Annualised performance data in euros at 30th June 2023

We tend to focus on commodities when discussing investments in the ‘Alternatives’ market. If there are other investments or sectors outside the traditional equity and fixed income asset classes that you would like to hear more about, please do let us know.

This month, we return to China and the energy sector in our analysis of the commodities sector. We know that China is the world’s leading consumer of commodities and therefore a key determinant in the direction of commodity prices over time. During times of strong economic growth in the region, the Chinese yuan tends to appreciate versus the US dollar. As crude oil is priced in dollars, an appreciating yuan has the effect of exporting inflation from China overseas. This tends to drive the value of the US dollar lower (versus the yuan) and the US dollar price of crude oil higher. Conversely, during times of weak Chinese economic growth, the yuan falls in value versus the US dollar. This results in China exporting deflation abroad, driving the value of the US dollar higher (versus the yuan) and the US dollar price of crude oil lower.

Trends in the Chinese yuan, the Shanghai Stock Exchange Composite Index and the US dollar value of crude oil often exhibit a strong positive correlation, which can be seen in the next chart.

 

It is therefore very important to focus on growth trends in China when assessing the relative value of commodities as a potential investment. Crude oil prices averaged $50-$60 per barrel from 2015 to 2019. The Covid shock of 2020 led to a sharp decline in energy prices, followed by a strong recovery in 2021. Crude oil prices are now stabilising in the region of $73/barrel. If crude oil prices continue to decline into the $60’s and below in the months ahead, it will be strong signal that global economic growth is slowing down.