National Bank Financial says it is staying overweighted in resources, a position it first advocated last summer.
NBF moved to overweight gold and base metal stocks last summer on the assumption that the decline of the U.S. dollar and the strength of the world economy would boost commodity prices. Recently, it extended this stance to forest products and energy, too.
In a new report, NBF’s economic and strategy team offers five reasons it is sticking to that call:
- it sees the strongest in-sync world growth in 25 years, projecting global GDP growth of about 4.5% in both 2004 and 2005;
- it expects the U.S. dollar to fall further due to the ever-growing twin deficit in the U.S. current account and federal budget;
- the Bank of Canada now appears concerned about currency appreciation, and ready to fight it with rate cuts;
- it believes that the secular decline of commodity prices has been reversed, and;
- it believes that sell-side analysts are too cautious on commodity prices and earnings estimates.
“The biggest risk in continued overweighting of resources after the recent run-up is the possibility that China will repeg its currency upward much sooner than expected in order to restrain the current boom and its potential inflationary pressures,” NBF cautions. “In our current baseline scenario, the yuan remains where it is for the next 18 months, or at least until the Chinese banking system is recapitalized. A sudden revaluation of the yuan would have a large effect on Chinese demand for commodities and on Asian central bank purchases of U.S. Treasuries.
“Another risk is that of Fed tightening sooner than expected. That eventuality would require reconsideration of our scenario of U.S. dollar decline and would slow U.S. demand for Chinese products,” NBF adds. “Investors will be well-advised to monitor these developments closely.”