Goldman Up on Commodities, Down on China
05/24/2011 4:02 pm EST
This morning, Goldman Sachs (GS) repeated its bullish call on commodities.
Let's start at the beginning. On April 12, the Wall Street investment bank told its clients to sell commodities.
Goldman reversed that call May 6, saying that the pullback in commodities has created “an opportunity for more upside potential, particularly in the second half of this year, when fundamentals are expected to tighten.”
Today’s call is stronger: “The risk/reward once again favors being long commodities,” Jeffrey Currie, head of commodities research at Goldman Sachs in London, told clients today, May 24. “Economic growth will likely be sufficient to tighten key supply-constrained markets in the second half, leading to higher prices.”
As of 3 p.m. New York time, West Texas Intermediate crude was up 1.8%, and copper had climbed 0.9%.
Interestingly, the increased bullishness on commodities comes on a morning when a pack of big banks—including Goldman Sachs—have cut their forecasts for economic growth in China. Goldman analysts Yu Song and Helen Qiao told clients today that they expect China’s economy to grow by 9.4% in 2011, instead of a previously forecast 10%.
The Goldman analysts expect just one more 25-basis-point increase in interest rates from the People’s Bank this year, even though they raised their forecast for 2011 inflation from 4.3% to 4.7%. Inflation in China ran at an annual 5.3% in April, well above the government’s 4% target.
The explanation for any seeming inconsistency here is timing. The Goldman analysts expect the inflation rate to peak in June, at an annual 5.6% rate, and then drop below 5% in August.
Other banks that have recently cut their projections for economic growth in China include:
- ING (to 9.8%, from 10.2% on May 12)
- Credit Suisse (to 8.8%, from 9.1% on May 1)
- Daiwa (to 9.2%, from 9.6% on May 11)
- and JPMorgan Chase (to 9.4%, from 9.5% on May 20).
If you’re trying to figure out when to buy Chinese stocks—and equities in other emerging markets—the lower growth projections are signs of progress toward a bottom. Until projections come down (and indeed overshoot to the downside), investors can’t look forward to a rally when projections go back up.
In my opinion, these projections are still too optimistic, because they understate how entrenched inflation has become in China. For example, the official Xinhua news agency recently reported that meat prices on May 14 were up 44% from a year earlier.
I’d say the odds are against only one more interest-rate increase from the People’s Bank in 2011.
Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.