Goldman Is Doubling Down on Its Bullish Commodity CallBy
Bank sees persisting backwardation driving positive roll yield
Raw materials to outperform other assest classes in long run
Commodities will bring better returns than other assets in the long run, according to Goldman Sachs Group Inc.
Strong global demand growth across raw materials reinforces the case for owning them, the bank said in a Dec. 11 report, maintaining its 12-month overweight recommendation on commodities. Goldman sees returns of 7.5 percent in 2018, driven by a market structure known as backwardation that’ll lead to a positive roll yield -- when investors sell more-valuable, expiring contracts at the end of each month and buy less-expensive futures in order to maintain their exposure.
The Bloomberg Commodity Index has risen about 6 percent since the second half of June on signs of tighter supply and stronger demand in everything from crude to cotton and gasoline to industrial metals. Unlike forward-looking assets such as equities which discount future growth, commodities rise as the current levels of demand exceeds the levels of available supply, according to Goldman. The bank sees 12 percent returns next year from the roll yield in oil and expects other metals markets to join zinc in backwardation.
“Given that equities are supported by robust views around future growth, should these views falter even as current activity remains robust, commodities should outperform equities and other asset classes, reinforcing our overweight view,” analysts including Jeffrey Currie wrote in the report.
The Bloomberg Commodity Index slipped 0.4 percent at 3:43 p.m. in London. The measure of returns from raw materials is down about 4 percent this year.
Goldman doesn’t expect the oil market to shift back into contango -- when future prices are higher than near-term contracts -- in 2018. The positive roll yield in crude will drive energy returns of 12 percent next year, the bank predicted.
For the broader industrial metals index, Goldman expect returns to be mostly flat next year. It’s most bullish on copper, and most bearish on aluminum. “In both cases robust and synchronous global growth will help to keep metals demand strong across the board in 2018,” the bank said. “The difference lies in the supply dynamics.”
For copper, while healthy supply growth is expected in 2018 and 2019, the bank said the market is now at the end of an expansion boom as capex investment contracted sharply after the commodity selloff in 2014. That implies that mine production is likely to decelerate after 2019. Still, the strong demand outlook is helping keep Goldman bullish on prices over the coming years with forecast of $7,050 a metric ton next year for the metal traded on the London Metal Exchange.
On aluminum, Goldman sees rising odds of more supply from both inside China, mostly in areas with limited air-pollution problems, and outside of the Asian nation, making the bank bearish.