Commodities in Focus: China’s Stimulus and Geopolitics

Today we're going to talk about how the recently announced Chinese stimulus measures, the turmoil in the Middle East, could possibly impact natural resources and investing in that area.

Just to level set, I want to talk about natural resource performance in the third quarter, which was fairly lackluster, for many different reasons, for many reasons that I just mentioned. But I also want to point out that we thought we would get out of that mood with three things which we have seen. Rate cuts by global central banks around the world. We thought we saw significant stimulus out of China that was structural in tension. And if you continue to see tension with global supply of commodities, due to geopolitical risk events, that would be important to continue to put the pressure on prices.

With regards to China, first we have to remember that China has been in economic malaise for most of the last four years, really in a recession since COVID. In most cases, you would expect the largest consumer of commodities in the world that would lead to some severe tailspins by the commodity market, but that hasn't happened. And that really points towards some strength of the supply demand market of commodities around the world.

We look forward to what do these stimulus measures mean, it may take more than a quarter or two for them to come through and there's room for more stimulus measures. But the bottom line is that we'll be seeing China consuming a lot more and that's in sync with the US with its consumption. You now have the two largest economies in the world who are in the consumption mode and that's very good for commodities and natural resources.

Regarding the Middle East, there's clearly a ratcheting up. You have to really look at how Israel is going to respond. What are they going to do? It's possibly that it could be a tit for tat response, and therefore, the reestablishment of a geopolitical risk premium, the oil price that we've seen over the last several days, will start to dissipate. But there's an equal chance that they'll be much more severe, and therefore, they will probably go after oil infrastructure within Iran, and we haven't seen the geopolitical risk premium nearly high enough to reflect that. The Houthis are also likely to get involved, and we continue to see them playing an important part of disrupting oil flows around the world. And therefore, as we see those disruptions, we're going to see prices increase.

Just as background, the Houthis are a tribe based in Yemen that are really controlled by Iran and serve as a proxy force for them. They are really impacting trade through the Red Sea and through this Suez Canal for everything from tankers to cargo ships and are really forcing a lot of trade to go around the Cape of Good Hope in South Africa and increasing transportation cost.

To sum all this up and broadly speaking, we think that the recent structural changes in Chinese stimulus, we think the turmoil that's ongoing and somewhat appears to be unending in the Middle East, all point towards the fact that there is a firming of the demand supply dynamic within commodities and really makes the case for why you want commodities to be in your diversified portfolio.

Thank you.