- Investors should buy commodities as a recession appears unlikely over the next year, according to Goldman Sachs.
- Fears of an imminent recession have rocked oil prices and other commodities lower in recent months.
- "Commodities are the best asset class to own during a late-cycle phase where demand remains above supply," Goldman said.
Investors should buy commodities as a recession outside of Europe appears unlikely over the next year, Goldman Sachs said in a note on Monday.
The bank said that heightened fears of an imminent recession have pummeled commodity prices in recent months, making them especially ripe to be purchased by investors looking for a good deal.
Oil in particular has suffered one of its worst monthly performance in eight years, while other petroleum products and metals remain far below its prior highs, Goldman highlighted.
"Judging by recent price action, we find commodities are pricing a recession more so than any other asset class," Goldman said.
But if a recession doesn't arrive, as economists as Goldman expect, then now is a great time to buy commodities.
"Macro data points to a deceleration but no contraction as weakness in manufacturing is contrasted with a still strong services sector, partly on a travel boom...In our economists' view, we are likely to remain in a long late-cycle stage for some time still," Goldman said.
And commodities tend to be one of the best performing asset classes during late-cycle stages, according to the note.
"Equities could suffer if inflation stays elevated and the Fed is more likely to surprise on the hawkish side. We believe commodities, on the other hand, are the best asset class to own during a late-cycle phase where demand remains above supply," Goldman said.
The bank highlighted that certain physical commodity markets are the tightest they have been in decades, especially for oil, and that they can get even tighter.
"The current market environment is lopsided as prices have fallen alongside falling inventories on the back of irrational expectations which is dis-incentivising demand destruction, at a time that markets cannot balance without it," Goldman said.
"As further inventory falls trigger depletion risks, commodity returns for investors are likely to strengthen," Goldman said. The bank said the next catalyst to drive commodity prices higher is a balancing of supply and demand dynamics.
"Low inventories create backwardation, volatility and make total returns exceed spot price appreciation," Goldman explained.
Within the commodity sector, Goldman expects energy and agricultural commodities to lead the sector higher as seasonality turns more favorable for them.
"With oil the commodity of last resort in an era of severe energy shortages, we believe the pullback in the entire oil complex provides an attractive entry point for long-only investments," Goldman concluded.