Commodities will be the best-performing asset class next year, achieving returns of more than 40 per cent, analysts at Goldman Sachs said in their recently published Commodity Outlook for 2023, ‘An underinvested supercycle’. The first three months will be “bumpy”, but then scarcity will ensure rising prices.
The poor kick-off in the coming year is driven by economic weakness in Europe, as well as in the US and China. But as a result of underinvestment, people are more “bullish” than ever. In October 2020, Goldman announced a super-cycle for the first time, write Jeff Currie and Samantha Dart, bank analysts.
Their end-2020 forecast for a long-term commodity super-cycle did not materialise as energy prices fell sharply in spring 2022 due to several developments, including the corona pandemic, the war in Ukraine, declining demand and investment and rising interest rates by central banks combined with declining liquidity in the markets.
‘Despite a near-doubling year-on-year of many commodity prices by May 2022, investment across the commodity complex disappointed,’ the pair write in their Outlook. The underperformance of capital inflows is a challenge for the future: it does not solve the commodity shortage.
S&P GSCI Total Return Index
Partly as a result, Goldman Sachs expects the S&P GSCI Total Return Index - the main measure of commodity price movements - to rise 43 per cent in 2023. That comes on top of gains of about 24 per cent this year. The market consensus is that there has been insufficient investment in commodity markets, for example in mines and new oil fields, partly due to “the extreme volatility over ESG considerations”, as Goldman puts it.
Market participants are seizing on this tightness and looming shortages to increase their exposure to commodity markets. The top 15 commodity-focused hedge funds have increased their assets by 50 per cent this year to $20.7 billion, Bloomberg cites data from Bridge Alternative Investments Inc. Without sufficient investment, long-term shortages will remain, with higher and more volatile prices for oil, gas and copper, Goldman said.
The merchant bank’s view does not convince everyone: analysts at Citigroup think many economies are too fragile for commodities to grow much more. ‘The tide could be turning,’ Citigroup’s Ed Morse argued earlier this month. ‘The possibility of a global recession poses a threat to an asset class that has enjoyed a renaissance over the past two years.’
East Capital agrees with this view. The Scandinavian asset manager thinks the super-cycle is over, as 2022 is likely to have been the end as the period of very low interest rates and very strong liquidity in the market is over, as reported on Investment Officer Luxembourg.