Goldman Sachs is recommending investors add to their commodities exposure for 2024, forecasting a 21 per cent return in the oil-heavy S&P GSCI Commodity Index over the coming year.
The end of both central bank monetary tightening and recession fears is a big reason for the bullish view. Goldman Sachs’ economists believe the negative effects of monetary tightening on global GDP, and thus commodity demand, are easing.
Global manufacturers have been running through existing inventories rather than producing through much of 2023, limiting commodity demand. Goldman’s head of Americas natural resources equity research, Samantha Dart, believes this process will end in early 2024.
Goldman Sachs expects the OPEC+ nations to maintain production curbs through next year, supporting a Brent crude price of US$92 on average (Brent is currently hovering near US$82.) A lack of refining capacity will keep supplies of gasoline and diesel low relative to demand, also sustaining a higher commodity price.
The industrial metals most involved in the decarbonization trend, notably copper and aluminum, are also predicted to generate strong returns in 2024. China’s demand for these metals have remained strong despite a major slowdown in the property sector. Ms. Dart predicts a 25 per cent increase in the copper price in 2024 with gains focused in the second half of the year. Aluminum prices are expected to climb 12 per cent.
Commodity investments also offer a hedge against heightened geopolitical tensions in the Middle East and Eastern Europe. Goldman Sachs experts do not forecast a significant spread of conflict nor, for instance, the closing of the Strait of Hormuz. Any heightened tensions, however, raise the risk of commodity supply disruptions that would cause a sharp jump in spot prices.
Ms. Dart and her research team make a compelling case for commodity investment but it remains dependent on a strengthening global economy. Investors in resource sectors should remain sensitive to signs of slowing global growth.
-- Scott Barlow, Globe and Mail market strategist
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Ask Globe Investor
Question: I bought Air Canada (AC-T) shares in 2021 at $33 per share, hoping for capital gains. As you know, the shares keep on falling. Is there any hope of recovering my investment? Should I take a loss rather than hang on?
Answer: You probably don’t need to hear this, but airlines are notorious for separating investors from their money. Not only are they prone to boom-bust cycles, but they face a multitude of other risks including volatile fuel prices, high debt loads, geopolitical shocks and competition that can range from intense to irrational.
Sure, if you catch them at the right time, airlines can deliver hefty gains. From the start of 2017 through the end of 2019, Air Canada’s shares soared more than 250 per cent. But then COVID-19 hit, and the shares came in for a hard landing. Somewhat perplexingly, they have remained grounded for the last few years, despite a strong rebound in air travel since pandemic restrictions were lifted.
In the third quarter, Air Canada’s operating revenue surged 19.2 per cent to $6.3-billion and its operating income more than doubled to $1.4-billion. Yet, if the moribund stock price is any indication, investors remain concerned about the airline’s rising labour and fuel costs, its $5.4-billion net debt load and the potential for higher interest rates to cause a slowdown in the economy in general, and air travel in particular.
Yet another concern cited by analysts is that Air Canada’s capital spending is projected to increase by $4.4-billion in 2025 and 2026 as it adds 18 Boeing 787-10 Dreamliners to its fleet. This will “substantially reduce” Air Canada’s free cash flow, Walter Spracklin, an analyst with RBC Dominion Securities, said in a note following the release of the company’s third-quarter results on Oct. 30.
Mr. Spracklin cited other challenges including increased competition, a potential drop in discretionary spending because of high interest rates and the prospect of sharply higher labour costs. The union representing Air Canada pilots is expected to seek big wage gains in its current contract negotiations, in line with the double-digit pay increases won by pilots at rival WestJet Airlines and several U.S. carriers.
With all of these factors expected to weigh on the stock, Mr. Spracklin reduced his price target on the shares to $17 – the lowest on the Street – from $21 and maintained his “sector perform” rating. Air Canada’s shares closed at $18.11 on Friday.
Now for the good news: Not every analyst is as pessimistic as Mr. Spracklin.
“The bears’ argument would be that the strong Q3 was yesterday’s news with the market concerned about the weaker demand trends moving forward, impact from the global conflicts, and higher energy prices,” Kevin Chiang, an analyst with CIBC Capital Markets, said in a note to clients.
But Mr. Chiang sees a “disconnect” between AC’s sluggish share price and its business fundamentals.
“Near-term demand trends are proving to be more resilient than feared while the increase in capex, which should have been expected given the 787-10 [order] announcement back on September 25, does not jeopardize AC’s balance sheet,” Mr. Chiang said.
From a valuation standpoint, the shares are attractive, he said. He rates the stock “outperformer” and has a target price of $30 – just above the average analyst target of $29.57, according to Refinitiv data.
Ultimately, you’ll have to decide if you’re willing to hang on for a rebound that may or may not materialize. If you believe that all of the bad news is already baked into Air Canada’s stock price, and if you can be patient, staying the course might be a prudent move as the downside from here may be limited.
On the other hand, one benefit of selling now is that – assuming you hold your shares in a non-registered account – you’ll be able to claim a capital loss that you can use to offset capital gains. If you don’t have any capital gains in 2023, you can carry your capital loss backward up to three years, or forward indefinitely, to offset capital gains in other years. By selling now, you can also deploy the proceeds into a stock with an outlook that isn’t clouded by so many uncertainties.
When faced with such a dilemma, it often helps to ask yourself: If you didn’t already have a position in the stock, would you buy it today? If the answer is yes, then hanging on may be the right move. If the answer is no, then selling is probably the better choice.
--John Heinzl (E-mail your questions to email@example.com)
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Compiled by Globe Investor Staff