UNITED STATES May 11 2017 12:35 PM
NEW YORK (Scrap Register): Goldman Sachs has reiterated its view to be overweight in commodities as an asset class. For starters, the Federal Reserve is in a monetary-tightening cycle, and this is when commodities tend to fare better than equities, corporate bonds and Treasury.
“This makes sense; the Fed hikes when the economy approaches overheating, and commodities perform best when aggregate demand is strong and inflation is rising,” Goldman added.
Meanwhile, whereas commodities collectively fell last week, any fears about weaker demand as a result of Chinese monetary tightening may not be warranted.
“First, the latest round of policy tightening in China comes from a point of strength rather than weakness,” the bank continued, citing 6.9% year-on-year economic growth in the first quarter.
“Second, much of the recent tightening in China is aimed at reining in financial excesses and hidden leverages rather than forcefully hitting the brakes on the real economy.”
Risks to commodities revolving around China should not be ignored, Goldman said. “However, we think the market view on China may have shifted from overly optimistic to overly pessimistic,” said the bank, citing expectations for stronger global demand for oil.
Therefore, despite the recent weakness, Goldman maintains their commodity overweight recommendation.