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  • Natural Resources

    Improved Global Economy Sustains Early Rebound

    Shawn Reynolds ,Portfolio Manager
    April 20, 2017

    1Q 2017 Hard Assets Equities Strategy Review

    During the quarter, VanEck's hard assets strategy returned -3.50% (measured by VanEck Global Hard Assets Fund, Class A (GHAAX), excluding sales charge). On a relative basis, the strategy outperformed its commodity equities-based benchmark index, the Standard & Poor's® (S&P) North American Natural Resources Sector Index (SPGINRTR),1 which returned -4.25% in the first quarter.

    The better news is that for 12-month trailing performance as of 3/31/17 was very robust, with the hard assets investment strategy posting a 24.27% gain and besting its benchmark which returned 17.93%. Click here for details on performance.

    The largest contributions to positive performance came from, collectively, positions in Diversified Metals & Mining, where companies capitalized on robust emerging markets demand and continued to benefit from a tightening in supply for a number of underlying metals. The largest detractors from overall performance on the quarter were Oil & Gas Exploration & Production Companies which suffered from, in general, a period of meaningful profit taking after a strong year of performance and a decline in the price of oil.

    Market Review

    In the early stages of a cyclical rebound from a deep downturn, it is not surprising to see, as we did this past quarter, mixed performance among the industry's sub-sectors (the movement from an inflection point into a rebound is not always linear). Still, we believe that the three pillars of the next commodity bull market (technical, macroeconomic, and fundamental) are firmly anchored in place.

    Technical: Cyclically, we are still in the early stages of a rebound from one of the deepest downturns that we have seen in the history of the natural resources industry.

    Macroeconomic: We continue to see a tilt in sentiment on the global economy from pervasive negativity towards cautious optimism. In fact, we may be experiencing an inflection in global economic factors. For example, China's economy appears to be improving, India has demonetized, Brazil's economy also appears to be on the mend, and there are positive signs of growth in Mexico.

    % of Global Purchasing Manager Indices ("PMIs") in Expansion Territory

    Global Purchasing Manger Indices Chart 1

    Source: Haver Analytics; Bloomberg; Renaissance Macro Research.
    Data as of March 31, 2017. Not intended to be a forecast of future events or a guarantee of future results or investment advice.

    Fundamental: The corporate restructuring that has been taking place over the past two-and-a-half years (a significant part of which involved deep cuts in capital expenditure) has essentially drawn to a close. As a consequence, we are now seeing supply tightness in many of the commodities in which we are involved and a slight shift toward growth initiatives driven by an increase in investment expenditures. With the best balance sheets and cost structures they have seen in generations, many companies are now generating, on a relative basis, a great deal of cash.

    Natural Resources Sub-Sector Review

    Energy: The crude oil market just started to rebalance at the end of the quarter. We expect this to continue throughout the second quarter as refineries come out of maintenance (and start to draw down crude) and there is an uptick in global gasoline demand. While there was some skepticism about OPEC's ability to maintain its announced reduced levels of production, they have been maintained, and may even be extended.

    Gold: After a disappointing close to 2016, the gold market has regained momentum during the first quarter of 2017. Concerns over the current geopolitical environment, particularly regarding the new administration's ability to implement pro-growth initiatives in the U.S., have been some of the primary drivers of gold and gold equities thus far this year.

    Diversified Metals & Mining: Mining companies capitalized on robust emerging markets demand during the quarter. In addition, the copper market saw supply disruptions and the zinc market experienced tightening supply. With demand also solid in both China and the U.S., we are seeing steady global demand for commodities catching up, or balancing, with limited supply growth.

    Top Quarterly Contributors/Detractors

    In the first quarter, the top contributing companies continued to see positive results from restructuring initiatives and strong commodity prices while the detractors were primarily impacted by asset flows and the decline in oil price.

    Top Contributors/Detractors

    Source: FactSet; VanEck. Data as of March 31, 2017.
    Weights denoted with "0.0%" indicate a position sold during the quarter. Contribution figures are gross of fees, non-transaction based and therefore estimates only. Figures may not correspond with published performance information based on NAV per share. Past performance is not indicative of future results. Portfolio holdings may changes over time. These are not recommendations to buy or sell any security.

    Outlook: Still Bouncing Back from Historic Downturn

    At the close of this first quarter of 2017, we believe that it is vitally important to remember that we are still only roughly a year into the recovery from one of the most historic downturns ever experienced in the natural resources industry.

    This rebound continues to be fueled by the relentless increase in global consumption for most commodities and the never-ending struggle on supply to satisfy this demand. Certainly, the draconian capital expenditure cuts of the last several years have impacted global output. However, the real benefit from industry-wide and corporate restructuring activities has been that many companies have optimized operations, increased productivity, and dramatically improved profitability. In turn, this has resulted in higher quality, lower risk investment opportunities. While this phenomenon is not being universally realized by all corporations or recognized by all market participants (and, thus, does not guarantee a smooth increase in shareholder value), we believe the long-term, secular nature of these changes will ultimately generate attractive returns.

    Investment in Commodities Can Address Rising Inflation Concerns

    Despite this improving fundamental outlook for commodities and natural resources equities, by far the most pressing issue among the clients and investors we have visited with over the past several months is the emergence of inflation and the search for the optimal strategies to help mitigate this risk. While inflation has not been an overly impactful aspect of the global economy for some time, commodities and natural resources equities have historically exhibited a strong link to inflation, performing well in both rising interest rate environments and during periods of higher-than-average growth in general consumer prices levels. In the past, and under most circumstances, when inflation has risen above 2% — the current target of many central banks — commodities and natural resources equities have been an attractive investment alternative.

    Commodities and Natural Resources Equities vs. Rising Rates

    Commodities Natural Resources Equities vs Rising Rates Chart 3

    Source: VanEck; Bloomberg. Data as of February 2017. Charts are for illustrative purposes only. Past performance does not guarantee future results.

    Consumer Price Index (CPI) vs. Commodity Prices

    CPI vs Commodity Prices Chart 4

    Source: Federal Reserve Bank of St. Louis. Data as of February 2017. Charts are for illustrative purposes only. Past performance does not guarantee future results.

    We Favor Investment Ideas that Deliver Long-Term Structural Growth

    One of the main principles of our investment philosophy continues to be to look for investment ideas that can deliver long-term structural growth and an eventual increase in intrinsic value. Since we remain convinced that positioning our portfolios for the future, and not just reacting to current circumstance, is of paramount importance, our focus across the sectors in which we invest remains on companies that can navigate commodity price volatility, inflation risks, and the intrinsic volatility of the markets to help grow sustainable shareholder value.

    Download Commentary PDF with Fund specific information and performance. For a complete listing of the holdings and performance, please visit VanEck Global Hard Assets Fund (GHAAX).