Global Natural Resources - 2017 Outlook
What lessons have you learned from 2016?
In addition to reinforcing the cyclical and unpredictable nature of commodity prices, the lessons learned over 2016 are the same as previous years – avoid high-cost producers and highly-indebted companies at all times. The Henderson Global Natural Resources Strategy’s investment process is designed to minimise risk to these factors and commodity price cycles.
What are the key themes likely to shape the markets in which you invest in 2017?
After several difficult years for the mining and energy sectors, sentiment towards natural resource equities rebounded sharply through 2016. A combination of vigorous cost cutting, stronger commodity prices, earnings upgrades and improving supply and demand has led the team to tilt the strategy back towards upstream mining and energy production companies and away from the more defensive midstream and downstream segments.
Below are the Team’s current views on key resource sectors:
Many of the major mining companies have now aggressively reduced operating costs and capital expenditure. High debt distress levels seen last year have fallen as companies sold assets and raised capital. Additionally, the consolidation of mines and improving supply and demand fundamentals have started to boost many mineral commodity prices.
Favoured sub-sectors include diversified miners, base metal companies and selected gold companies bringing on new projects. The global move towards electric vehicles and battery storage of renewable energy is driving prices higher and strengthening demand for battery-grade lithium carbonate, and companies with lithium exploration and production assets. Many US-based resource companies are likely to benefit from a potential increase in US infrastructure spend.
The supply and demand balance for oil is looking more favourable. The collapse in oil and gas capital expenditure resulting from more than two years of weak oil prices is now starting to impact production output, oil field decline rates and reserves. In order to meet future demand, a return to higher oil prices is needed to attract the required levels of new investment. The Organization of the Petroleum Exporting Countries (OPEC), as always, remains the wildcard. The Team believe that there are considerable opportunities in the oil sector and that energy stock sentiment will continue to respond accordingly.
A profound wave of consolidation by the world’s biggest agriculture companies is transforming the dynamics of the industry. The globalisation of agriculture is continuing, as the sector leaders strive to advance food production and crop protection technologies, and benefit from global diversification of supply, production and trading. Our focus is on large, global companies that use technological advantages and innovation to increase crop yields and reduce agricultural input costs.
Interesting sectors include seed technology, crop protection and fertiliser companies. New advances in precision farming, technology breakthroughs in areas such as agricultural biologicals and changing consumer diets, provide additional investment opportunities. We continue to find growth opportunities in several specialist food production areas such as salmon, horticulture, dairy products and other protein producers.
What are your highest conviction positions moving towards the new year?
With renewed confidence in many mineral commodities, we are tilting the portfolio back towards some upstream mining and energy sectors, such as diversified miners, base metals and oil and gas exploration and production companies. We hold significant positions in selected US-based resource companies that are likely beneficiaries of increased infrastructure spending. We also retain high conviction positions in several gold and lithium companies that are opening new, high quality, low cost mines.
What should investors expect from your asset class and your portfolios moving forward?
The earnings upgrade cycle is in full swing and share price valuations appear reasonable if commodity prices remain at or above current levels. With the improvement in many mineral commodities, natural resource production companies are likely to report improved earnings over 2017.
David Whitten joined Henderson Global Investors following its acquisition of 90 West in 2015. Prior to this he was an equal partner and shareholder at global natural resources specialist, 90 West, and Head of Global Resources as well as a lead portfolio manager at Colonial First State Investments.