Following the downturn of the last 5 years, our 20 years of experience in resources investing leads us to believe the sector is positioned for a brighter 2017. Why?
The global resources stocks we’re looking for in 2017
The past 12 months have been eventful for global resources investors. We have seen a rally from highly distressed levels in a cyclical sector. Margins have expanded significantly and companies that had distressed balance sheets and were forced sellers of assets a year ago are looking much healthier. The financial distress experienced by many management teams last year will not be forgotten in a hurry. The focus will remain on capital discipline and balance sheet repair as well as reinstating or growing dividends. It was clear that the industry invested too much growth capital in the boom years and oversupply caused prices to fall to unsustainably low levels. As long as supply side discipline remains we should see companies increase in value as they pay down their debts. We believe that the worst of the cycle is behind us.
Commodity prices will continue to be volatile in the short term, especially in response to political or economic developments, however the global economic outlook appears to be stable. Chinese stimulus policy will remain a key driver of the mining commodities whilst compliance by OPEC members should underpin oil prices. For precious metals, the picture is less clear. Geo-political uncertainty and the potential for inflation associated with increased spending could lend support, whilst stronger industrial growth and rising interest rates could in turn be bearish. In this environment, we maintain a positive view towards most base, bulk and energy commodities.
Following the downturn of the last 5 years, our 20 years of experience in resources investing leads us to believe the sector is positioned for a brighter 2017. Why?
Our analysts have made 1,343 mine and site visits to 76 countries since our inception in June 1997. We visited 82 companies last year to develop our global outlook and highest conviction investment positions across geographies and sectors.
2017 Global Resources Outlook
Outlook highlights:
- We remain wary of policy makers moves in China and the US and how this will impact certain mining stocks. Significant infrastructure investment and supply disruptions should be positive for copper producers.
- Oil demand is being revised upwards and global spare capacity remains at the lowest levels on record, but this depends on behaviour from OPEC and Russia.
- High quality Exploration and Production companies in the Permian and Montney Basins of North America are positioned to profit.
- Precious metals are at crossroads: a rise in inflation or interest rates could lead to starkly different outcomes. Rising political risks could drive safe haven investor demand.
- Capital discipline remains key to shareholder returns. We look to M&A activity for growth in our portfolio from stocks with low costs and strong balance sheets.
This year, the Colonial First State Wholesale Global Resources strategy celebrates its 20th anniversary in Australia.
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