SocGen sees recovery in commodity prices

Commodities should bottom out and recover to some extent in the medium-term, but investors are considerably more sceptical now in the aftermath of the spectacular declines seen in prices recently.

However, the bursting of China’s equity bubble and the ‘regime change’ in the Yuan “rocked the previous consensus” of a closed economy with a government capable of containing eventual risks, analysts at Societe Generale said in a research report.

Due to the above, their strategists asked themselves what the implications of a “lost decade” of growth in China – the odds of which they place at 40% - would be.

“For emerging economies, trade links to China are powerful shock transmitters. For the advanced economies, the financial market response matters most,” the French broker said.

Regarding the implications of the above scenario for the different asset classes SocGen said more bad news on China would spell “significant widening” in emerging market credit spreads.

Going ‘short’ GBP/USD and NZD/USD were also possible sensible strategies for hedging the risk of further weakness in EM and China, especially in the event of ‘hard-landing’ scenarios.

Gold would be the best choice among commodities under a ‘hard landing’ scenario.

Within equities, advanced markets were favoured over emerging ones and real estate over capital goods. In the EM space, domestically-driven economies such as India were the best option.