Gee, what's Goldman Sachs on about?

First up, it cuts its view of Chinese economic growth, which was too high anyway, and then it upgrades its view on commodities, which was cut on April 11.

Ducks and drakes by the Vampire Squid perhaps.

In any case, it sees a stronger second half for the year, although it admits issues like the problems in the eurozone could upset the more confident outlook, especially for oil prices.

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Goldman Sachs now sees Chinese economic growth of 9.2% this year (10% previously) and 9.2% from 9.5% for 2012.

At the same time, the broker upgraded its view on inflation in China in 2011 to 4.7% from 4.3%.

As newsworthy as the cuts are, they merely bring Goldman Sachs back to where most analysts are.

Bloomberg says a poll of analysts gives a median figure for China's GDP growth this year of 9.4%, so Goldman Sachs is no longer an outlier (and looking a bit foolish the longer the 10% estimate remained unchanged).

"Overall, inflation in China is more entrenched than we had expected," the broker said, adding "lower U.S. growth and higher oil prices are unfavorable".

Inflation in China will remain high for the rest of the year because of the continuing drought and expected impact on rice prices and on industrial production in the summer and early Autumn

The broker upgraded its Brent crude average forecast to $US113.50 a barrel from $US103.00 for 2011, and to $US130.00 from $US110.00 for 2012.

Goldman Sachs is turning "more bullish" on raw materials and recommends investors buy crude oil, copper and zinc as sustained economic growth will tighten supplies.

And in London the firm suddenly went positive on commodities again, despite the weaknesses seen in the past three weeks and that cut to its China growth forecasts (which should mean less upward pressure on commodity prices, shouldn't it?).

"We believe that the risk/reward once again favors being long commodities," Goldman analysts led by London-based Jeffrey Currie said in a report reported on Bloomberg today.

"Economic growth will likely be sufficient to tighten key supply-constrained markets in the second half, leading to higher prices from current levels."

The Standard & Poor's GSCI spot index of 24 commodities has lost about 10% since the firm said on April 11 to sell a basket of commodities including oil, copper and cotton, and in the same week recommended they stay "underweight" in raw materials.

Bloomberg said Morgan Stanley also raised its estimate for Brent oil by 20% to $US120 a barrel this year.

Concerns over sovereign debt in Europe, the contraction in Japan's economy and the end of the second round of quantitative easing in the US are among "potential triggers" for a loss of confidence that post a risk to oil, Goldman said.

Reflecting its weaker China outlook and a cut to its US growth forecast two weeks ago, the US investment bank also pared its growth outlook for the wider region. For most of Asia excluding Japan Goldman Sachs lowered its growth forecast by around 40 basis points this year and now expects growth of 7.8% in 2011 down from 8.2%. Oil exporter Malaysia is the main exception to this outlook, Goldman said.

"In 2012, we are again roughly in line with consensus for the region but above consensus on China, Hong Kong and the Philippines and below consensus on India and Thailand," the Goldman note said.

Copyright Australasian Investment Review.
AIR publishes a weekly magazine. Subscriptions are free at www.aireview.com.au

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