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Goldman: Forget Commodity Stocks In 2016
Aspire | 14 December 2015
By: Lim Si Jie
Articles (169) Profile

If 2015 was any indication of commodities’ performance in 2016, commodities will continue to slump in 2016, at least that’s what Goldman thinks. China, which gobbled up raw materials everywhere from Australia to Chile as it underpinned the commodity super cycle that peaked in 2011, is fast experiencing a slowdown that is exacerbating a supply glut in most major commodities.

Goldman: 2016 Not Year of Commodities

As China rebalances away from heavy investment, its demand for hard commodities has slowed down. Goldman Sachs thinks the pressure is likely to persist, maintaining its underweight position in commodities for the next 12 months.

While Goldman have been forecasting weak commodity returns since 2014, the extent of this weakness has far exceeded its initial expectations. Goldman noted in its research that not only are supply adjustments to cut production still insufficient, but demand is also lacklustre. Goldman also warned that prices have not yet bottomed out, unless supply is restricted or demand picks up again.

Citi, Goldman: Oil and Copper Worst of the Lot

There is still hope for better commodity returns as a recovery in the global business cycle begins in early 2016. That being said, growth headwinds could delay the entry into the recovery phase and there are downside risks.

In particular, Goldman predicts that crude oil and copper are unlikely to rebound because of excess supplies.

Citigroup also supports Goldman’s commodity price hypothesis, citing the fact that commodity prices have yet to price in the potential rate hike in December. Historically, higher Fed interest rates typically boost the dollar, which makes commodities priced in the greenback more expensive to holders of other currencies.

Saudi Arabia: Willing To Stabilise Oil Price

Prices recovered towards the end of November after Saudi Arabia’s indication of willingness to support prices. This allowed prices to remain supported weeks before the OPEC meeting at of US$40 for WTI and US$43 for Brent Jan’16.

Throughout the year, major oil producing countries have tried to hype the market with bullish sentiments. Yet, as long as nothing concrete is being rolled out, the market will continue to hold its sceptical views on oil prices. Continued strengthening of the USD against the sentiments of Saudi Arabia’s willingness to cooperate would be the hot debate till the next OPEC meeting.

However, non-OPEC producers (Russia) must also cooperate for this to happen. With the Dec’15 OPEC meeting approaching, the market is focusing their attention on Saudi Arabia once again to see if they would be changing their stance.

Investors Takeaway: Don’t Be Fooled By High Risk-To-Reward Ratio

Goldman believes that current prices present an appealing entry point to position for higher commodity returns, despite the perceived asymmetric risk-reward at low spot prices and the following weak returns.

Thus, Goldman warns that investors should avoid entering into long positions of oil instruments of oil-related stocks despite the high risk-to-reward ratios that such stocks could possess at the moment. Examples of such stocks include Ezion, Sembcorp Marine and Keppel Corp.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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