Ideas in action – China re-opening should offer support to energy prices

February 09, 2023

Energy prices have gone down dramatically in the past few months. This is shown by the consolidation seen in the oil price. Lower energy prices have boost growth expectations and lower inflation expectations, offering strong support to risk assets generally. We think that we are nearing the end of the correction in the oil price. The key argument supporting this view is the re-opening of China.

As the below chart should help to illustrate, the relationship between oil prices and Chinese activity has been strong. We expect this relationship to hold in the expected recovery. Higher oil prices should support all energy producers, including renewables which the convertible bond market is heavily exposed to. We intend to maintain exposure in our preferred energy issuers to benefit from this bounce.

Historical relationship between oil prices and Chinese exports

Historical relationship between oil prices and Chinese exports chartSource: Bloomberg and BlueBay Asset Management. Weekly data to 1 February 2023.

Outlook

The macroeconomic scenario is getting more supportive for risk assets. However, in our view the recent collapse in risk aversion is somewhat complacent and some asset classes have gone too far in pricing a perfect scenario. We expect macro uncertainty to prevail in a year that will see a large slowdown in both economic and earnings growth. We re-iterate our view that convertible bonds are a good tool for investors to navigate such an environment, allowing them to retain equity exposure with a lower volatility.

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