Gold­man Sachs says it won’t be ‘hood­winked’ on com­modi­ties again

Gulf Times Business - - BUSINESS -

Gold­man Sachs Group Inc is stand­ing firm with its bullish bet on com­modi­ties even after be­ing “hood­winked” by a shift in in­vestor sen­ti­ment that pum­melled prices late last year.

The bank ex­pects 12-month re­turns of 9.5% from the S&P GSCI gauge of raw ma­te­ri­als, and sees value in oil and met­als after a volatile De­cem­ber, ac­cord­ing to a Jan­uary 10 re­port.

The bank also raised its gold price fore­casts on in­creas­ing pol­icy un­cer­tainty and as the US Fed­eral Reserve pauses in­ter­est rate in­creases, an­a­lysts in­clud­ing Jeff Cur­rie wrote in the note.

Gold­man is stick­ing to its bet after a fourth quar­ter in which the bank’s jus­ti­fi­ca­tion for own­ing com­modi­ties, ac­cord­ing to the an­a­lysts, “failed spec­tac­u­larly.” For most of 2018, the world seemed to be in a “late-cy­cle” en­vi­ron­ment that sup­ported com­mod­ity prices.

As prices tum­bled, though, data pointed to the world be­ing in more of a “mid-cy­cle” pe­riod, ac­cord­ing to Gold­man.

“So what hap­pened to the late-cy­cle play­book?” Cur­rie wrote. “The an­swer is that it wasn’t as late cy­cle as we had ini­tially thought.”

The fourth quar­ter sell-off, in which oil prices tum­bled al­most 40%, had more to do with the un­wind­ing of ex­u­ber­ant sen­ti­ment than a de­te­ri­o­ra­tion in fun­da­men­tals, Gold­man said.

Sup­port­ive eco­nomic poli­cies in China, the world’s big­gest con­sumer of most com­modi­ties, a weak­en­ing dol­lar – which in­creases the al­lure of raw ma­te­ri­als priced in the green­back – and Opec’s com­mit­ment to shrink­ing a crude glut now sup­port the bank’s bullish view, it said.

“A mid-cy­cle pause is a buy sig­nal for com­modi­ties,” Cur­rie wrote. “With rates now on hold and the dol­lar ex­pected to weaken from cur­rent lev­els, the cur­rent rally in oil and com­mod­ity prices is un­likely to run into the same head­winds as it did in June and July of last year.”

Con­sump­tion also dis­ap­pointed last year, as it be­came ap­par­ent that a pe­riod in which emerg­ing and de­vel­oped mar­kets would grow to­gether is un­likely.

That’s partly due to gov­ern­ments of emerg­ing na­tions like China that ag­gres- sively man­age their growth in way that moves counter to de­vel­oped coun­tries.

It’s also due to de­clin­ing de­mand for big-ticket items such as homes and cars in de­vel­oped mar­kets.

“Part of this has to do with sat­u­ra­tion of de­mand, but there is also a shift in pref­er­ences within the mil­len­ni­als,” Cur­rie wrote. “This is crit­i­cal as durable goods de­mand is a key driver of eco­nomic cy­cles since the con­sump­tion is lumpy.”

Still, Gold­man said that in­vestors should look out for “idio­syn­cratic op­por­tu­ni­ties” this year. “We won’t be hood­winked in 2019 by weaker sen­ti­ment, which is why we main­tain our over­weight rec­om­men­da­tion de­spite mod­est down­ward re­vi­sions in our oil and metal fore­casts ear­lier this week,” the bank’s an­a­lysts wrote.

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