Daniel Sullivan, Head of the Global Natural Resources Team, discusses the three key themes he sees as likely to shape the outlook for resources in 2020.
What are the key themes likely to shape markets in 2020?
Whenever we speak to investors and companies, the acceleration in importance, acceptance and policy around environmental, social and governance (ESG) issues has become a critical consideration.
Public opinion can be expressed broadly and gather support rapidly, causing shifts in company behaviour and signaling to policy makers that shifts are expected. This trend can be seen playing out in the growth in wind and solar power and the pursuit of the circular economy, which, put simply, is an economy aimed at eliminating waste and ensuring the continual use of resources.
The second key theme is the US-China trade war. A resolution should give a boost to trading sentiment, activity and global demand for commodities.
The third area concerns a possible agricultural recovery, where the US has had a five-year down cycle and expectations are low.
Where do you see the most important opportunities and risks within your asset class?
After three weak years, we are now seeing a revival in exploration, discovery and development across many commodities and countries. Smaller companies are creating value, particularly in gold and oil and gas projects.
Many new lithium supplies were brought to the market in the first lithium boom, resulting in short-term oversupply. Now, as the second stage structural demand growth continues, we think that it is likely that prices will recover and deliver additional projects and output into the fast-growing electric vehicle and storage battery industries.
Is the market supportive of growth for resource companies in 2020?
In our view, many leading resource companies are continuing to present attractive valuations, exhibiting low financial leverage, simplified businesses, strong cash flows and dividends. As this continues, these types of companies should be well sought after and re-rated. The delivery of new high quality discoveries and projects to the market should boost growth rates for companies into the coming years.
As reflected in the chart below, the second technology boom, ultra-low interest rates and 'safe-haven' buying has left other major world equity regions behind – particularly commodities, resource equities and emerging markets.
Growth of US$100 across indices
Source: Bloomberg as at 9 January 2020. Monthly total return indices data in US dollars, rebased to 100 as at 29 January 2010. Past performance is not an indicator of future performance.
The nature of resource markets is that they are driven by cyclical demand and supply factors and tend to behave in a volatile manner, presenting investment opportunities regularly over longer cycles. We believe the sector has the potential to deliver attractive returns to investors over time.