.svg){kind=logo}
The global macroeconomic landscape
Earlier in the year we observed a downward shift in growth expectations across the global economy. Our indicators began flashing yellow in early May, signaling potential challenges ahead. Commodity markets tend to be more sensitive to economic fluctuations than equity markets, and this is especially true for emerging markets.
Higher interest rates in the US have a cascading effect on other economies. For instance, countries like Brazil may require policy rates that are several hundred basis points above US rates to attract capital. The current situation has prompted a more conservative stance in our investment approach, reflecting a cautious outlook — a flashing yellow indicator rather than an outright red, which would be a complete loss of economic momentum.
In the US, consumer spending remains robust, bolstered by fiscal stimulus over the past few years. However, the question remains: will this be sufficient to sustain growth in the face of challenges in other regions?
We are already witnessing contractions in commodity consumption in some European economies — this is typical for commodities during periods of global economic slowdown, as it is a late-cycle sector.
Regarding China, the economy appears to be experiencing significant challenges, but a lack of comprehensive data makes it difficult to gauge the full extent of the country’s economic health.
The role of gold in today's market
The geopolitical landscape, particularly the tensions between the US and countries like China and Russia, has led to increased interest in gold as a safe-haven asset. Central banks are diversifying their reserves with other liquid assets, and gold is becoming an essential component of this strategy.
As countries seek to reduce their dependence on the US dollar, gold serves as a reliable alternative. The onshoring trend, coupled with the need for countries to secure their economic interests, suggests that gold will remain well-supported in the foreseeable future.
Current trends in the commodity complex
Commodities such as iron ore and steel have been underperforming, particularly in China, where oversupply issues are exacerbated by challenges in real estate and infrastructure. The situation in the US is not as dire, but ferrous metals remain a relatively lower-growth sector.
While we have maintained a cautious stance on these commodities, we remain optimistic about the overall space over the next five to 10 years, driven by strong thematic trends.
Copper is experiencing a more favourable outlook. The relationship between copper demand and global GDP has historically been strong, and recent trends such as electrification and AI investments are adding to this demand. We anticipate that copper will likely grow at a rate of two times GDP over a full economic cycle, making it a compelling investment opportunity.
Natural gas as a transition fuel
When discussing the energy transition, natural gas emerges as a critical component. Five years ago, many investors believed that renewable energy could meet all our energy needs. However, the reality is more complex. Local resistance to wind energy, cost inflation and intermittency issues have highlighted the need for energy sources to support the transition.
Natural gas offers a practical interim solution. It is cost-effective, reliable and can significantly reduce emissions compared to coal. As countries transition to cleaner energy sources, natural gas will play a vital role in this journey. Efforts are developing to export liquefied natural gas (LNG) to coal-dependent markets like China, India and Europe — further underscoring the potential for growth in this sector.
Constrained oil supply environment
In contrast to natural gas, the oil market presents a different set of dynamics. The current environment is characterized by constrained supply and a well-managed oligopoly in OPEC. Companies are becoming more conservative in their spending, recognizing that oil growth is likely to be limited.
This shift in focus means that returns will increasingly come from returning free cash flow to shareholders rather than from new growth projects. While this presents a different risk profile compared to natural gas, it also offers opportunities for investors who can navigate the complexities of the oil market.
The challenges of the steel market
Recently, Canadian steel producer Stelco was acquired at a significant premium. Stelco operates one of the lowest-cost blast furnaces and has been effectively navigating the challenges of the steel market. The company’s shares had been discounted due to concerns about potential emissions taxes, but the reality is that Canadian and US companies are supported by tariffs on imports from countries with higher emissions.
Climate action goals created a favourable environment for companies like Stelco, which can capitalize on the growing demand for steel while maintaining competitive pricing. The market has begun to recognize this value, leading to a re-evaluation of its growth prospects.
Managing exposure to the resource sector
Most Canadian investors gain exposure to resources by allocating to an index – resources account for roughly 30% of the TSX index. However, this exposure is concentrated in a limited number of companies: approximately eight names account for most of this allocation, which raises concerns about diversification.
As active managers with deep expertise in the resource sector, we recognize the significant opportunities for alpha generation in the space beyond the well-known names. By exploring a broader range of companies, capital allocators can enhance their exposure to the sector while mitigating concentration risk.
The resource sector presents a complex yet promising landscape for investors. While we face challenges in certain commodities, there are also compelling opportunities driven by long-term themes, such as onshoring/reshoring, infrastructure investment and the ongoing energy transition.
By maintaining a diversified approach and staying attuned to market dynamics, asset managers can navigate the complexities of the resource sector and capitalize on the opportunities that lie ahead.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. The content of this page (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.