Global Resources May Be a Tremendous Value Buy
The incredible resurgence of commodities during the most recent market cycle hardly qualifies as newsworthy at this point. Yet, despite ongoing concerns over inflation and escalating geopolitical pressures, there is an element to this larger story that has seemingly lingered silently by and continues to slip under the radar for most investors beyond large institutional clients.
In the future, as observers look back on this current period of market developments, one dynamic that we believe will likely fall into the “why didn’t more people notice” category is the historically low and attractive valuations resource equities exhibit in this exact moment, particularly in light of the larger macro conditions and disciplined management across the industry.
Over the last half decade, Energy and Materials—the sectors predominately comprised of resource equity stocks—have been cast into obscurity over the “value vs. growth” discussion. They have toed the line between both categories at almost every step with some companies being labeled one or the other or, in some cases, both.
After many years of restructuring and fine-tuning their business models, though, resource companies have firmly migrated into the “value” camp, exhibiting streamlined operations, healthy balance sheets and a strong propensity for return of capital. If that weren’t enough, all of this has coincided with a near-term historical move in commodity prices as we face record inflation, a developing energy crisis in Europe, rising global food insecurity and the rapid adoption of metals-reliant clean energy technologies.
Getting Over the Uncertainty
Why are some investors still not budging?
Sure, resource equities have a historical track record of higher-than-market-average volatility and a strong correlation with underlying commodity prices. However, this has proven to be an effective returns diversifier for long-term allocators over the last 20+ years.
Investors Who Held on Tight Have Been Rewarded Over the Last 20+ Years
Source: Bloomberg, FactSet. Data as of July 2022. *Provided as of first-availability of index data. “U.S. Energy Stocks” represented by the S&P Equal Weight Energy Sector TR Index. “Global Mining Stocks (ex. Gold)” represented by the EMIX Global Mining ex. Gold and Energy TR Index. “Global Agribusiness Stocks” represented by the Dax Global Agribusiness TR Index. “U.S. Stocks” represented by the S&P 500 TR Index. For illustrative purposes only. Past performance is not indicative of future results. One cannot invest in an index. Definitions and disclosures included on the last page of this presentation.
We expect extractive industries will continue to face an accelerating timeline of alignment with carbon reduction measures, too. Though, to be sure, this is also definitely not the defining measure by which most value stocks are currently being evaluated by the market. For example, Utilities—routinely praised for their value attributes—are responsible for electricity production, which currently accounts for approximately 25% of greenhouse gas emissions (nearly as much as transportation at around 27%).
At the End of the Day, Value is Value
Value stocks should—and, in all likelihood, will—continue to be identified by their generally lower price relative to fundamentals as well as their tendency for higher paying dividends. If recognized appropriately, in nearly all cases, Energy and Materials will been the clear winners here, exhibiting not only the most attractive relative valuations, but also the most attractive absolute valuations versus their own long-term averages.
Energy and Materials: Record Low Valuations, Record High Dividend Yields
Source: FactSet, Bloomberg. Data as of July 2022. Energy, Materials, Utilities, Telecom, Healthcare, Consumer Staples, Consumer Discretionary, Industrials and Information Technology represented by respective sector-level indices of the S&P Global 1200 Index (note: Financials and Real Estate sectors excluded due to historical data availability). Definitions and index disclosures below.
Investors that recognize this opportunity today might not be as surprised as others when the time comes to reflect on the markets of yesteryear.
Global Resources Investing Favors an Active Approach
The VanEck Global Resources Fund offers exposure to a broad range of companies involved in the exploration, production and distribution of resources across the global Energy and Materials sectors. This includes exposure to traditional energy (oil and gas), alternative and renewable energy, gold and precious metals, base and industrial metals and agriculture equity markets.
While the fund’s active investment approach is predominately highlighted by its asset-based, on-the-ground research—including site visits and engagement with company managements—it also relies extensively on rigorous analysis of companies’ financial health and valuations. As part of its analysis, the investment team conducts scenario modeling to evaluate asset and business-line specific base-, best- and worst-case outcomes, and dials in on valuations based on comparable public market multiples, discounted cash flows and mergers and acquisitions transactions.
By many accounts, and based on their own decades of research in the space, the investment team believes the low valuations of many of these global resources companies to be historic in nature.
Global Resources Fund Offers Investors a Great Way to Take Advantage of Historically Low Valuations
Source: FactSet, Bloomberg, VanEck. Data as of July 2022. *Nutrien was formed via a merger of PotashCorp. and Agrium Ltd. in January 2018. For periods prior to this, Nutrien’s EV / EBITDA values are represented by an average of EV / EBITDA values for PotashCorp. and Agrium Ltd. “Global Equity Sectors” are represented by the sectors of the S&P Global 1200 Index (note: Financials and Real Estate sectors were excluded due to lack of available data). Portfolio holdings and composition are subject to change. Not a recommendation to buy or sell any security. Definitions and index disclosures below.
