Commodities to outperform other asset classes again, says think tank

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Commodities are set to generate “superior total returns” in 2023 and likely to outperform other asset classes again, driven by a fundamental shift in the global macroeconomic landscape and low inventories, analysts at Goldman Sachs said.

“With macro and micro dynamics re-aligning again, we believe investors are likely to take a fresh look at the commodity sector and the long-term super-cyclical arguments that point to a severe lack of long-term capex,” the Wall Street bank said in a note.

The bank forecast returns of 9.9 percent, 17.3 percent and 31.2 percent on commodities over a three-, six- and 12-month horizon, respectively, on the oil-heavy S&P GSCI Commodity Index.

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Over a 12-month period, the bank forecast returns of 46.9 percent from energy, 29.6 percent from industrial metals and 5.7 percent from precious metals.

“Oil markets are not pricing the expected uplift in demand combined with the downturn in Russian production,” Goldman Sachs said, adding “China’s reopening is a game-changer.”

Easing of COVID-19 curbs in China and expectations around smaller rate hikes from the US Federal Reserve lifted hopes around strong demand outlook for commodities.

“Commodities like crude oil, refined petroleum products, LNG, and soybeans are particularly set to benefit from China’s demand tailwind,” the bank said.

Oil prices have risen more than 18 percent since falling to a near one-year low in early December, while benchmark copper prices on the London Metal Exchange are trading around seven-month high.

“While central bank tightening and the USD have been macro headwinds for commodities in second half of 2022, we believe a sustained inflection in the USD provides an ingredient for a fairly significant upside in commodities,” Goldman said.

“Gold, in particular, is likely to be on a cusp of sustained upside as de-dollarization is very bullish gold… at a time that the Fed is likely to increasingly shift towards growth concerns slowing its rate hike path allowing ETF holdings to stabilize,” it added.

Meanwhile, the share of bank finance going to renewable energy rather than fossil fuels has little changed in six years, raising questions about how fast lenders are pushing energy clients to become greener, according to research published Tuesday.

Since 2016 renewable energy has taken 7 percent of a total $2.5 trillion in bank loans and bond underwriting for energy activities, according to a report commissioned by environmental groups including Sierra Club and Fair Finance International.

The total annual sum banks have facilitated into renewable energy rose to a high of $34.6 billion in 2021, from $23.2 billion in 2016, but the amount going to fossil fuels increased too, keeping renewables’ share broadly the same.

Last year the share of renewable energy in funding 8 percent while in 2021 and 2020 it stood at 10 percent and 7 percent respectively.

“Banks’ financing to fossil fuels should be phasing out as financing to renewables increases drastically to have any chance of reaching the world’s – and their own – climate goals,” said Ward Warmerdam, researcher at Profundo, which compiled the data.

Lenders say they must finance fossil fuels given global energy needs but that they are helping firms transition to low-carbon future.

Renewable companies often tap private and government finance too, they add. — Reuters

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