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Hear from Portfolio Manager Shawn Reynolds about the strong operational performance of global resource companies and potential implications for the sector based on his current outlook for global growth, inflation, and geopolitical risk.
Transcript
Hi, it’s Shawn Reynolds here. I’m the portfolio manager of the Global Resources Fund.
So things that get us excited today with regards to the global natural resources sector are, first and foremost is that, this time next year, we definitely expect to see interest rates lower than they are right now.
That has been a big overhang on the sector for a long, long time. The other thing that we want to look at is global growth, because that’s a big impact on the overall sector.
Very mixed in 2023, but again, this time next year, we expect that the U.S. has seen at least something close to a soft landing and China is and well into its turnaround. So we think that global growth is going to look much stronger a year from now than that it does or it does right now.
And then the final thing that we want to talk about is the sectors overall, the natural resources sector overall has really been disciplined for a number of years. And this has resulted in excellent operational and financial performance.
And that in turn has turned into fantastic valuations, great balance sheets, strong free cashflow, and excellent returns to shareholders in terms of dividends and share repurchases.
So what we like to think is that there is truth to the statement of getting paid to wait. And that is in the natural resources sector, while we see everything kind of filter out and settle down this year as we come to something new in the natural resources sector.
Similarly, the main risk that we focus on is that the interest rates do not come down. Of course, that means higher inflation. And higher inflation is a good thing for the natural resources sector.
But the bottom line is that the higher interest rates does concern us with regards to the overall economy. So geopolitical risk is another one that cuts both ways.
We’re very concerned about geopolitical risk overall, just for human society, but the fact is that where those geopolitical risks are occurring right now, basically in Ukraine as well as in Israel and the West Bank, these are very, very impactful areas with regards to commodities and we all know what those are.
And those can go either way with regards to tightening the market or loosening the market. So we could have peace break out in the Middle East, that would be fantastic.
Overall, it would probably take out $10 with regards to crude. Of course, if the Red Sea transit becomes even tighter and tighter, if Russia decides to punish others with regards to Ukraine and pulls back on more grain exports and stuff like that, we’re going to see increase in commodities, in those commodities and therefore in terms of inflation. So that can cut both ways.
We have to look at economies overall in the world. This sector does well when all economies are headed in the right direction. So we really have to look at the U.S., we have to look at China, we have to look at Europe, which is probably 12 months behind the U.S. in terms of its rate-cutting decisions and how inflation is affecting them. The economies overall are going to head in the right direction to support overall demand for commodities.
One of the things that’s top of mind of the clients that we’ve spoken to over the last couple of months is this dichotomy of performance between the tech sector, the AI sector, and natural resources.
And what we’ve heard is very honest opinions or attitudes towards, ‘Hey, how do we fund our tech exposure?’ Really, where do we go? We go to places that haven’t done nearly as well. And that’s the natural resources or real asset sector.
Really anything that’s not tech, but that’s an area that you’ve seen clients using as a source of capital to fund their AI and tech exposure. Now, we don’t expect that to go away completely, but we do feel that the hyperbole that’s been around the AI and tech sector is going to diminish somewhat.
And certainly through ’24 and ’25. And that will hopefully be at one less drain of capital from real assets. And maybe you’ll see an allocation and whether it’s 5% or 10% whatever it is, it sticks or gets replenished or rebalanced back to that level.
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