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« on: April 29, 2013, 08:19:20 pm »
Credit Suisse says stay bearish on commodities. Gold stocks most oversold since 2008.
Quote
Credit Suisse says: "We agree with the bearish stance on commodities held by Ric Deverell, the head of the Credit Suisse Commodities Research team. We are cautious, given that:
"Elevated prices have triggered a significant capex response, leading to excess supply in many instances;
"Chinese risks are high: the investment-share of GDP, at 48%, must fall, total debt is now 230% of GDP and quantitative tightening has started;
"Global macro momentum is slowing (we think until mid-year);
"We believe the dollar trade-weighted index has the potential to continue strengthening (typically bad for commodities);
"Commodity prices are still high relative to their long-run averages (in real terms) and producers' break-even (especially for iron ore and oil); and
Equities are a better inflation hedge than commodities, in our view.
"We remain underweight the resource sectors, which suffer from poor capital discipline, sub-market FCF yields, still optimistic positioning and in nearly all instances spot prices are below consensus (implying downgrade risks).
"Mining is the most sensitive sector to ISM and China infrastructure spending; yet, P/E relatives are only middling. When the sector has been this oversold, it has typically still underperformed over the next three months.
"Big-cap oil tends to outperform only when equities are falling, credit spreads are rising or the oil price is spiking, none of which is likely. The sector is not cheap on relative P/Es after adjusting for under-depreciation. However, we reverse our preference among the resource sectors - and now prefer energy to mining (the oil price looks more resilient than industrial commodities prices and valuations more attractive).
"Quoted gold stocks look very cheap (with P/B and forward P/E relatives both at 12-year lows) and are the most oversold since 2008.
Impact of lower commodities prices: each 10% off oil adds 0.2% to developed world GDP growth, takes 0.4% off inflation and thus allows central banks (esp. the ECB) to be more aggressive. It also adds 1.4% to European EPS (1.2% in the US). GEMs in aggregate are hurt by lower commodity prices, but commodity importers like India, Turkey and Korea benefit. Akzo Nobel, PPG, BMW and Safran are Outperform-rated commodity users with pricing power."
