Eyeing Opportunity for Rebound in Resources
July 26, 2023
Read Time 2 MIN
Recent underperformance of resource equities amid uncharacteristically high inflation has been somewhat perplexing, yet is not entirely without precedence. In the 2000s’ bull market rally, for example (where inflation averaged just above 3%), there were five periods of greater than 10% decline lasting over a minimum of three months. Declines over these periods averaged around -15% and lasted for five months. Similar incidences also occurred in the 1970s when year-over-year inflation averaged just above 7%. U.S.-listed energy and mining stocks experienced (again) around five of these same types of declines, with an average loss of approximately -17% and -19%, respectively, over a length of around four months.
What is perhaps more important to consider here, though, is that, despite these brief periods of underperformance, cumulative returns of resource equities over both of these ten-year stretches landed north of +250% (or around +13% on an annualized basis).
We continue to monitor several key themes shaping the fundamental outlook for resource equities over both the near- and longer-term (An expanded PDF version of this commentary, including fund specific information can be downloaded here):
- Exploration spending – The impact of capital expenditures reductions—particularly in sectors such as Oil & Gas and Base & Industrial Metals—appears to have taken hold. Though reported spending is on the rise in 2023, it is likely insufficient to offset any type of major supply deficiencies already baked-in as a result of multi-year underinvestment. We believe companies focused on capital discipline may benefit from stronger returns and cash flow generation in the months or years to come should fundamentals drive commodity prices even higher.
- Supply security – China continues to maintain a firm grip over the extraction and processing of a vast array of critical metals and minerals. This fact has underpinned efforts by clean energy technology manufacturers and metals producers to seek alternate sources of supply or, where possible, onshore or “friend-shore” (i.e., to neighboring, allied countries) certain parts of their processing operations. Companies successful in executing on this strategy may stand to benefit should trade tensions increase in the near-term and/or should resource competition become more challenging in the future.
- Shape and pace of the ongoing resources transition – Recent policy in the U.S. and Europe has been highly supportive of the development of renewable energy technologies. However, it is not clear yet exactly which industries or companies stand to benefit the most as a result. As well, the pace of renewable energy adoption and overall amount of capital investment required to meet most climate objectives, remains well below what is currently needed. From a portfolio positioning standpoint, we continue to seek out companies in the space that offer compelling, longer-term structural growth opportunity.
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