SINGAPORE – Commodities investors needn’t fear the Federal Reserve. Raw materials perform best when the US central bank is hiking rates, according to Goldman Sachs Group, which used the findings of a study to buttress its overweight call on the asset class, while acknowledging risks to its view.

During periods of rising interest rates, raw materials top returns from equities and bonds, analysts including Jeffrey Currie said in a May 8 report that crunched data going back to 1988 and covered four hiking cycles. The same finding came after a look at tightening cycles in China, they said.

“This makes intuitive sense because the reason why the Fed raises interest rates is that the economy displays signs of overheating,” the analysts wrote. “Strong aggregate demand and rising wage and price inflation are precisely the time when commodities perform the best.”

Commodities have dropped this year amid weakness in crude oil and some base metals, even as banks including Goldman have backed raw materials to do well again after they rallied in 2016. The 2017 losses stand in contrast to gains in equities, with US share benchmarks hitting records, and come as the Fed has started to tighten. US central bankers will meet in June to decide whether to pull the trigger on a third rate increase in six months.

The results of the bank’s study “reinforce our view that commodities should perform well over the coming year as the Fed increases policy rates with the labour market running at full employment and inflation moving toward its 2% target,” Currie said.

Still, Goldman did see a trio of risks, including a potential shift in the energy market. US shale may have fundamentally changed how oil supply responds to demand, it said. A second risk is that the tailwind from China over the past decades is unlikely to repeat itself, and third, the economic condition of the current hiking cycle may be different from previous ones, it added.

“The evidence from both the US and China suggests that commodities perform well when central banks are raising,” the bank said. “To be clear, this relationship is by no means causal. In fact, all else equal, higher rates tighten financial conditions and slow down the economy. But all else is not equal: an economy that is in a more advanced stage of the business cycle drives both the commodities rally and the central bank’s decision to raise rates.”

In addition to raising rates this year, officials are also debating how to shrink the balance sheet, which was swollen by asset purchases to support the recovery. “We want to move our balance sheet down to more normal levels,” Bank of San Francisco President John Williams said at the weekend.

After rising 11% in 2016 to post the first annual advance after a five-year losing run, the Bloomberg Commodity Index has declined 5.8% so far in 2017. Gasoline, sugar, natural gas, heating oil and crude oil are the biggest percentage losers.

In a phase of rising US interest rates, it’s base metals that tend to do best, outperforming energy commodities, precious metals, livestock and agricultural raw materials, Goldman said. “This is consistent with the observation that industrial metals tend to be most levered to economic cycles,” it said.