Global head of equity strategy at Jefferies, Christopher Wood, has cut his exposure to Indian equities by one percentage point in the Asia-Pacific ex-Japan relative-return portfolio, and Australia and Malaysia by half a percentage point each in favour of China, which has seen a hike in exposure by two percentage points.
The rally in China has been fast-forwarded by the approach of a seven-day holiday with the CSI 300 Index up 8.5 per cent on Monday, and 25.1 per cent in five trading days, he said.
The next day of trading in Shanghai will be October 8.
“As a result, China’s neutral weightings in the MSCI AC Asia-Pacific ex-Japan and MSCI Emerging Markets benchmarks have surged by 3.4 and 3.7 percentage points, respectively over the past five trading days to 26.5 per cent and 27.8 per cent.
"This highlights the difficulties facing fund managers in these asset classes in a country where key policy decisions are, seemingly, essentially made by one man,” Wood said.
Geopolitics a risk
A worsening geopolitical situation is the “biggest near-term risk” to global equity markets, Wood said, asserting that they have not yet fully discounted it.
On escalation of crises in West Asia or between Russia and Ukraine, he said all global markets, including India, will be hit badly, which they are not yet prepared for.
“The conditions on the ground in Ukraine and West Asia remain as highly charged as ever. Still, a (Donald) Trump presidency will trigger expectations that at least one of the conflicts, namely Russia-Ukraine, will be resolved quickly,” Wood wrote recently in GREED & fear, his weekly note to investors.
Earlier this week, the Israeli military said Iran had fired missiles at Israel in a sign of a worsening geopolitical crisis in West Asia.
The Israeli government reportedly warned of severe consequences if Tehran escalated the conflict.
Oil on the boil
An immediate casualty of the geopolitical developments was the crude oil prices (Brent) that surged nearly 5 per cent from around $70 a barrel on October 1 to over $74 a barrel.
Crude oil prices (Brent) dropped from $75 a barrel to $68 over the past few weeks.
According to analysts, the main driver had been the weaker-than-expected Chinese demand data, which confirmed that the world’s largest crude importer was still mired in economic turmoil, filtering into the construction, shipping, and energy markets.
The oil market remains at risk of a supply glut if Opec+ proceeds with plans to return some of its sidelined production, wrote analysts at Rabobank International in a recent note.
They expect Brent crude oil to average $71 in the October-December 2024 quarter (Q4CY24), and forecast prices to average $70 in 2025, $72 in 2026, and around $75 in 2027.
“We still await the flattening and decline of US tight oil production in 2025 alongside Russian compensation cuts to inject some price appreciation later in the year, and in 2026, but overall the market looks to be on a longer-term flat trajectory,” said Joe DeLaura, global energy strategist at Rabobank International.
“Geopolitical issues in West Asia still support upward price risk in the long-term,” wrote DeLaura in a recent note co-authored with Florence Schmit.
