More To Come From China?

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Written by: Nitesh Shah & Liqian Ren

Key Takeaways

  • Rising tariffs and domestic production under a Trump Administration could challenge commodity markets, but we believe that the WisdomTree Enhanced Commodity Strategy Fund’s (GCC) strategic over-weight in industrial metals and tin provides a potential edge in volatile conditions.
  • China’s modest fiscal measures disappointed markets, but further stimulus aimed at countering U.S. trade restrictions could support commodity rebounds, offering attractive entry points.
  • Despite oil’s current oversupply and weak demand growth from China, selective commodity exposures like copper and cocoa within GCC may capitalize on sector-specific opportunities amidst global trade uncertainty. 

The headlines from last week have been negative for commodities:

  • A new Trump presidency points to higher tariffs, more U.S. oil and gas production and a stronger dollar.
  • China’s fiscal package failed to impress, at least on the initial announcement.

While commodity prices fell on both announcements, they have managed to bounce back relatively quickly, as shown in figure 1. Price dips appear to be good entry points, especially if China has left dry powder for a further stimulus in the event of aggressive tariffs. It’s very possible that we haven’t heard the final word on China’s plans.

Figure 1: Bloomberg Commodity Index in November 2024

Sources: WisdomTree, Bloomberg. 1 a.m. GMT, November 1 – noon GMT, November 8. President Trump was announced the winner of the U.S. presidential election by the Associated Press around 10:30 p.m. GMT. The National People’s Congress Press conference took place at 8 a.m. GMT. Past performance is not indicative of future results. You cannot invest directly in an index.

WisdomTree has a broad-based commodity strategy, the WisdomTree Enhanced Commodity Strategy Fund (GCC). This is an actively managed exchange-traded Fund and intends to provide broad-based exposure to the following four commodity sectors: energy, agriculture, industrial metals and precious metals, primarily through investments in futures contracts. The Fund may also invest up to 10% of its net assets in any combination of shares of one or more exchange-traded products that primarily hold bitcoin and bitcoin futures contracts. The Fund will not invest in bitcoin directly.

In figure 2, we see how the performance of GCC compares to that of the Bloomberg Commodity Index over standardized periods:

  • GCC earned the performance advantage over the year-to-date, 1-year and 3-year periods.
  • While it was close on the “Since Fund Inception” time frame, the Bloomberg Commodity Index did take the performance advantage there.

Figure 2: Standardized Performance

Sources: LSEG, FactSet and WisdomTree; specifically, data is from the PATH Fund Comparison Tool, as of 9/30/24. NAV denotes total return performance at net asset value. MP denotes market price performance. Past performance is not indicative of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end and standardized performances, click here.

In figure 3, we are able to look at the 2024 year-to-date behavior of GCC. The recent days in November look more or less flat, at least compared to the volatility that was observed in August and September. Much of GCC's 2024 performance was earned from the end of January to the beginning of April.

Figure 3: 2024 Year-to-Date Performance of GCC

Sources: LSEG, FactSet and WisdomTree; specifically, data is from the PATH Fund Comparison Tool, accessed as of 11/8/24, but showing return for the period ended 9/30/24. NAV denotes total return performance at net asset value. MP denotes market price performance. Past performance is not indicative of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end and standardized performances, click here.

Finally, in figure 4, we indicate the underlying commodity exposures of GCC as they compare to the Bloomberg Commodity Index. In this piece, we will discuss the possible high-level ramifications of a Trump presidency and a China stimulus plan. These things may not impact all commodities equally, so it’s important that any investor is familiar with the underlying exposures of a given strategy. We can see:

  • GCC has a greater than 2.5% over-weight in four distinct exposures: copper, bitcoin future contracts, cocoa and tin. If these exposures rally, it could lead to GCC having the upper hand performance-wise.
  • There are four commodity exposures where GCC has a greater than 2.5% under-weight: soybean oil, soybean meal, gold and natural gas. If these exposures rally, it could lead to the Bloomberg Commodity Index outperforming.

Figure 4: GCC Over-Weights and Under-Weights vs. the Bloomberg Commodity Index

Sources: WisdomTree, Bloomberg. Data is as of 11/7/24. For current holdings of GCC, please click here. Holdings are subject to risk and change. You cannot invest directly in an index.

A New Trump Administration

U.S. President-Elect Trump and his running mate, Vice President-Elect J.D. Vance, led their campaign platform as trade hawks.1

  • Trump has floated the idea of a 10% or more tariff on all goods imported into the U.S., a move he says would eliminate the trade deficit.
  • He has threatened to impose a 200% tariff on some imported cars, saying he is determined, in particular, to keep cars from Mexico from coming into the country.
  • He proposes phasing out Chinese imports of goods such as electronics, steel and pharmaceuticals over four years. He seeks to prohibit Chinese companies from owning U.S. real estate and infrastructure in the energy and tech sectors. A 60% tariff on all Chinese-made goods has been floated.

Trump and Vance are also proponents of more domestic oil and gas production.

  • Trump has vowed to increase U.S. production of fossil fuels by easing the permitting process for drilling on federal land and would encourage new natural gas pipelines. He has said he would reauthorize oil drilling in the Arctic National Wildlife Refuge in Alaska.

Lower Trade Hurts Commodities

Lower global trade has historically been negative for commodity prices. The previous Trump Administration-driven trade wars led to an 11% decline in commodity prices in calendar year 2018 (based on Bloomberg Commodity Indexes).2 

Trump’s willingness to use Section 301 of the Trade Act of 1974 to expedite trade restrictions was demonstrated in his last presidency, so he may act quickly on delivering his promises.3 

Global Oil Oversupply

Global oil markets are already over-supplied, and the Organization of Petroleum Exporting Countries (OPEC)’s willingness to sit and watch the U.S. take a larger share of global demand is wearing thin. OPEC had already announced that it would unwind its production restraint, which has kept the market in balance over the past two years. Last Sunday, it announced that it would delay the unwind until the end of the year, but it is unclear if it will keep postponing it. Giving up market share has been a painful act, as Saudi Aramco demonstrated earlier this week with a 15% drop in Q3 profits from a year ago.4 

Oil demand weakness stems from China. In 2023, China accounted for 70% of oil demand growth. This year, it likely only accounts for 20% of growth. To be clear, oil demand growth in 2024 is likely to be under one million barrels per day, less than half the two million barrels per day growth in 2023. We are not expecting a significant pickup in oil demand growth in 2025, either. China’s economy has been weak, and it is electrifying quickly, too, reducing its reliance on imported oil.5 

Whether U.S. producers will expand oil production, even if they have federal approval, is another question. Weak prices may discourage them. But we don’t think OPEC will want to encourage them by boosting prices through aggressive supply tightness.

China’s National People’s Congress Meeting

The Standing Committee of the National People’s Congress (NPC) concluded its week-long meeting on November 8, 2024, with an announcement of a program to refinance local government debt. The program consists of six trillion yuan ($839 billion) in new bonds over three years and a further four trillion yuan ($558 billion) in previously announced bonds over five years to restructure its finances. In September, its central bank, the People’s Bank of China, injected a high dose of monetary stimulus, and markets were expecting a fiscal follow-through from the government. Apart from the local government debt refinancing program, the NPC offered no additional announcements of measures to directly stimulate its domestic economy. The package, therefore, disappointed the markets.

In summary, it’s a two trillion yuan/year debt swap, with a bit more to come. That’s within the expectations of many pre-release estimates of the local government debt swap. It is below market expectation this morning because that was the only thing announced. But we do expect more down the road.

China, as a key target for the new Trump Administration’s trade policy, is likely to suffer an economic blow. It is barely healing from the real estate implosion it has suffered over the past two years. China had a choice to get ahead of the tariffs by boosting its domestic economy beforehand. It appears it has chosen to wait and see how damaging the trade restrictions will be before offering its next big move.

New Entry Points

We believe the new Administration could begin the process of implementing tariffs shortly after Trump’s inauguration on January 20, 2025. With Republicans controlling the Senate and looking hopeful to have a House of Representatives majority, he may get the backing he needs relatively swiftly.

So, we believe that China will need to deploy its countermeasures relatively soon. Its best option is to stimulate its domestic economy rather than engage in big tit-for-tat trade restrictions. In the last trade war, it restricted U.S. soybean imports. But back in 2017, China sourced a third of its soybeans imports from the U.S. Now it only imports a fifth from the U.S., watering down this threat. China may continue to restrict exports of its own materials that are strategically important, like it has done with gallium, germanium and graphite, but these could be met with further hostility from the U.S.6 

If this stimulus is forthcoming, the commodity price dips could open up good entry points in metals.

Oil is less clear-cut, given China’s desire to electrify. But a rapid pickup in energy needs won’t be met by electrification alone, and hence, we think oil could benefit if OPEC doesn’t use the opportunity to drive up its market share.

Related: Navigating High-Yield Bonds: Opportunities, Risks and Fallen Angels

1 Source: Shannon Pettypiece, “What Trump’s return to the White House could mean for the economy and taxes,” NBC News, 11/6/24.
2 Source: Bloomberg.
3 Section 301 of the Trade Act of 1974 authorizes the President to take all appropriate action, including tariff-based and non-tariff-based retaliation, to obtain the removal of any act, policy or practice of a foreign government that violates an international trade agreement or is unjustified, unreasonable or discriminatory, and that burdens or restricts U.S. commerce.
4 “Saudi Aramco’s quarterly profit drops 15% on low oil prices,” Gulf Times, 11/5/24.
5 Source for stats in this paragraph: International Energy Agency.
6 Source for data in paragraph: Bloomberg.

Important Risks Related to this Article

There are risks associated with investing, including the possible loss of principal. An investment in this Fund is speculative, involves a substantial degree of risk and should not constitute an investor’s entire portfolio. One of the risks associated with the Fund is the complexity of the different factors that contribute to the Fund’s performance. These factors include the use of commodity futures contracts. In addition, bitcoin and bitcoin futures are a relatively new asset class. They are subject to unique and substantial risks and, historically, have been subject to significant price volatility. While the bitcoin futures market has grown substantially since bitcoin futures commenced trading, there can be no assurance that this growth will continue. In addition, derivatives can be volatile and may be less liquid than other securities and more sensitive to the effects of varied economic conditions. The value of the shares of the Fund relates directly to the value of the futures contracts and other assets held by the Fund, and any fluctuation in the value of these assets could adversely affect an investment in the Fund’s shares. Because of the frequency with which the Fund expects to roll futures contracts, the price of futures contracts further from expiration may be higher (a condition known as “contango”) or lower (a condition known as “backwardation”), and the impact of such contango or backwardation may be greater than the impact would be if the Fund experienced less portfolio turnover. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.

Past performance is not indicative of future results.

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