Goldman Sachs Remains 'Overweight' On Commodities
Editor's Note: Updating earlier story with more details from report.
(Kitco News)- Goldman Sachs analysts are maintaining an “overweight”rating on commodities despite recent weakness in the complex.
Commodities are still the top-performing asset class of2018, although they fell in June due to weaker emerging-market demand,trade-war worries and supply concerns in the oil market, Goldman said in areport published Wednesday.
“We believe all of these concerns have been oversold,”Goldman said. “Even soybeans, the most exposed of all assets to trade wars,[are] now a buy. The momentum in oil has already turned on news of tighterIranian sanctions and additional supply disruptions. In metals, we believe Chinesedomestic concern over credit availability has been the primary driver of recentweakness, fueled by trade wars, and is set to reverse given recent policyshifts in China.”
The bottom line -- Goldman said it still favors being“overweight” on commodities, forecasting a 12-month expected return of 10%. Therecent weakness is a “buying opportunity,” Goldman said.
“The pillars of our view remain: 1) strong late-cyclecommodity demand that depends on demand levels rising and not slowing growthrates, 2) supply disruptions in key oil and metal markets which are exacerbatedby recent sanctions, [and] 3) depleting inventories which create increasingpositive carry in nearly all energy and metal markets.”
The report forecast that the U.S. dollar “will likely weakenfrom here.” A softer greenback generally means higher commodities demand sinceit makes them cheaper in other currencies. Goldman pointed out that previously,divergence in global economic growth not only boosted the dollar but pushedgold below $1,250 an ounce. However, Goldman continued, Japanese and Europeaneconomic weakness “is now behind us.”
Goldman said it looks for restocking of commodities to pickup.
Meanwhile, easing of monetary policy in the criticalcommodity-consuming nation of China should support industrial metals, Goldmansaid. For example, analysts cited a People’s Bank of China’s decision to cutthe reserve ratio requirement by 50 basis points, effective Thursday. Further,the prospect of a trade war may make Chinese authorities even moreaccommodative, Goldman said.
“Industrial profits continue to expand and privateinvestment grows at a brisk pace,” Goldman said. “The combination of stabledemand and policy easing should support metals demand in 2018 H2.”
In the case of oil, Goldman said there are “significantsupply risks” despite an effort by OPEC to increase output. Analysts look forthe market to remain in deficit in the second half of 2018 despite higherproduction by core OPEC producers, with “rising supply threats elsewhere potentiallythreatening a sharp further rise in prices and global economic growth.”Production is most at risk in Iran as the U.S. administration targets adecrease in Iran’s exports, Goldman commented. Additionally, Venezuelan outputcontinues to decline, Libya’s output has been disrupted by violence, andCanadian production will likely be down by 360,000 barrels through July becauseof an outage at the Syncrude Canada plant.
By Allen SykoraFor Kitco News
Follow @AllenSykora
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