Worried about China? Watch here…

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There’s no other way to say it: The plot thickens. Yesterday we touched on the possibility of US sanctions against Venezuela.

They might be much more likely considering President Maduro is now breaking off diplomatic relations with America. US diplomats have 72 hours to get out.

This comes on the back of President Trump recognising Venezuela’s opposition leader as the interim president.

Protestors have flooded with streets in rebellion against the Maduro regime. Now it all hinges on where the loyalties of the army lie.

It makes the oil market the one to follow in 2019…

We don’t know yet what effect any of this will have on Venezuelan oil exports. But it could send energy markets gyrating.

Look around at what’s happening across the industry, all over the world.

Libya’s civil war is flaring up again. Fighting has broken out in the capital.

One faction leader is pushing south to secure the largest Libyan oil field — closed since December. The ceasefire of the last four months is over.

Nigeria is due for elections in February. An opposition candidate has come out and said he wants to ‘renegotiate’ existing contracts with the major oil firms that operate in the country.

That’s enough to stymy any further foreign investment to increase production in Nigeria — a vitally important supplier to the world market.

And now we have the US energy firms pulling back from capital spending. There has not been a bond sale from these guys since November. It’s no wonder…they’re now facing interest rates between 6-10% for financing. This lowers the level of supply these guys will bring to the market in the second half of this year.

The Brent oil price remains relatively subdued. The fear over global growth right now is enough to keep it suppressed.

But one wonders how quickly psychology could flip here if no recession turns up.

Consider the following point from The Economist…

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6% ain’t as bad as it looks

You’ve heard the news about China. Its GDP was ‘only’ 6.6% last year — the weakest since 1990. Donald Trump took to Twitter to crow about it.

However, China’s economy is much larger now. Even this modest growth figure (relative to history) adds an astonishing US$1.2 trillion in nominal GDP.

Consumption accounted for three quarters of last year’s growth rate, too.

For me, that puts Alibaba [NYSE:BABA] right in the spotlight. It’s due to release its fourth-quarter earnings results on 30 January.

Alibaba has the pulse of the consumer economy in China like no other stock.

It took a big battering in 2018. After hitting a high of $US209 in June, it fell to as low as US$129 early this month.

That’s nearly a 40% drop.

This is a prime example of how difficult the market can be.

Alibaba grew revenues at 54% in the third quarter last year. That’s an astonishingly high rate considering the size of the company already.

Alibaba also continues to invest in order to capture more of the Southeast Asian market in general. If you needed further proof this is a key growth market, consider British billionaire Sir James Dyson is moving his headquarters to Singapore.

Southeast Asia, in addition to China, gives Alibaba a very large growth profile over the next decade.

Despite the relentless negativity around China right now, the stock has rallied so far this month.

See for yourself…

 

A screenshot of a map  Description automatically generated

Source: Optuma

We’ve got a week before these earnings results are out. They’re going to be a crucial guide for the outlook when it comes to China this year.

Should China surprise to the upside, it could switch the psychology surrounding oil — from weakness to strength.

We’ll have to wait and see on that.

Certainly, the US economy continues to show remarkable growth. US jobless claims have now fallen for 10 straight years. That means more people are finding work.

It’s not just the US where jobs are booming either.

The Financial Times reported yesterday that the British labour market hit its highest level on record in 2018. Total pay grew at the fastest pace in a decade.

This is despite the uncertainty around the infamous ‘Brexit’.

Such strength in the labour market suggests share markets around the world continue to have potential upside.

And keep watching oil. There’s every chance it could heat up again.

All the best,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

  • Adios to US diplomats in Venezuela
  • Put 30 January in your diary
  • Plus, some compelling data to stay long stocks

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