Inflation, Transition Keep Resources RelevantShawn Reynolds, Portfolio ManagerJuly 26, 2021
Resource equities and commodities continued to grind higher during the second quarter of 2021, despite several macro-related events that slowed the pace of previous year-to-date gains through end-March. Among these events were, notably, the U.S. Federal Reserve Bank’s (the Fed’s) June announcement of its intentions to initiate several rounds of interest rate hikes beginning in 2023 and China’s May announcement of its enhanced effort to combat higher metals prices in the near term.
The Fed’s move came on the heels of an unexpected rise in both the personal-consumption expenditures (PCE) index and the consumer price index (CPI), which, according the Commerce Department and Department of Labor saw year-over-year increases through May of 3.9% and 5.0%, respectively. These levels trounced the Fed’s predictions for a year-over-year rise of 1.4% to 1.7% in the PCE in their June 2020 Federal Open Market Committee meeting. And, while still calling for “transitory” inflation, the Fed has conceded that potential interest rate hikes may soon be in order to slow the pace of growth.
Energy (Traditional) in the Vanguard
The largest movers in both the resource equity and commodity space were in oil and gas. West Texas Intermediary (WTI) crude oil saw a 24.2% rise in price to $73.5 a barrel by the end of the quarter. And U.S. energy equities, broadly, were up some 13.2% (as measured by the S&P 500® Equal Weight Energy TR Index).
While the U.S. crude oil rotary rig count increased steadily during the quarter, the rate of growth reflected the discipline that oil and gas exploration and production companies are exercising, on the whole, in not chasing higher oil prices. The last time that WTI was north of $75 per barrel (in 2014), the rig count was approximately three times higher than current levels.
Meanwhile, renewable and alternative energy names continued to struggle—particularly in the solar energy space (down 3.7% as measured by the BlueStar Solar Energy Industry NTR Index), where supply constraints in polysilicon and semiconductors, as well as an increase in steel prices, weighed on panel manufacturers.
Metals Stay Firm Despite…
In an attempt to cool lofty year-to-date rises in metals prices, China strongly encouraged its state-owned miners to forego participation in speculative buying (in futures markets in order to hedge production) and, further, announced releases from its strategic metals reserves to shore up shortages.
This was the first time since 2005 that China has made such a move in an attempt to slow commodity price increases and, while potentially nullifying some of copper’s meteoric rise year to date, both the red metal and iron ore prices ended up 7.3% and 19.4%, respectively, during the quarter.
Aluminum also had a good quarter, up some 14.8% over the three month period.
Gold Continues to Struggle
Gold and gold miners faced a less than ideal macro environment with the strengthening of the global economy. A strong U.S. dollar and the Fed’s announcement of potential rate hikes all but wiped out modest quarter-to-date gains as June drew to a close. Gold ended the second quarter at around $1,770 per ounce, eking out a 3.7% return over the three-month period after trading above $1,900 per ounce in the first two days of June.
A Grain on Grains
Grains and associated equities, being short-cycle, experienced weather-related volatility during the period. Despite the volatility, soybean and corn prices still saw 11.4% and 27.6% gains, respectively, on the quarter. Fertilizer prices and fertilizer equities were also strong. We believe it is likely that U.S. and European geopolitical sanctions against one of the world’s largest potash producers, Belarus, were largely responsible for driving up phosphate prices during the quarter.
Sector Performance Still Strong
Sector-level contribution was positive across the board in the second quarter of 2021. The largest contributions came from positions in traditional energy (i.e., oil and gas), copper and gold, which, together, accounted for over three fourths of the Fund’s quarterly gross performance. Despite underlying commodity market weakness in gold & precious metals and paper & forest products, both were still positive contributors to the portfolio.
Underperformance relative to the S&P North American Natural Resources Sector Index (SPGINRTR) was predominately driven by the Fund’s underweight positioning within traditional energy, where strong oil price gains helped boost sector performance during the quarter. Whereas SPGINRTR averaged an approximately 70% weighting to traditional energy, over the last three months, the Fund maintained a fairly even split between traditional energy and renewable & alternative energy (averaging an approximate 18% and 23% weighting to each, respectively).
The majority of changes to the Fund’s portfolio during the course of the quarter were concentrated in base & industrial metals and oil & gas. Notably, we added to our positioning in battery minerals and iron ore and increased exposure to several of our core U.S. oil & gas exploration & production (E&P) holdings. We also established a new position in ChampionX (1.1% of Fund net assets†), an oil field services (OFS) provider where we see a further upside in the company’s growing international market share and underappreciated margin progression in its production chemicals segment.
Price weakness in the renewable & alternative energy space provided an ideal opportunity to build back some of our exposure there too. Not only did we established several new positions – solar inverter manufacturer Enphase (0.7% of Fund net assets†) and solid-state battery producer Solid Power (via merger with Decarbonization Plus Acquisition Corp., 0.1% of Fund net assets†) – but also increased our position to residential solar provider Sunrun (3.4% of Fund net assets†).
Exits during the quarter included Cabot Oil & Gas, an E&P producer experiencing recent asset degradation, and railroad company Kansas City Southern, a stock we be believe to have been fully valued, for now, at its current share price.
Top Quarterly Contributors/Detractors
Winners Holding (% Weight) Est. Contribution (%) Performance Drivers First Quantum Minerals (3.9%) 0.97% Strong copper prices Freeport-McMoRan (3.9%) 0.71% Strong copper prices Diamondback Energy (2.9%) 0.69% Rebound in crude oil prices Losers Holding (% Weight) Est. Contribution (%) Performance Drivers Lundin Mining (1.9%) -0.26% Production guidance down Solaris Oilfield Infrastructure (0.7%) -0.21% Lower guidance than expected Sunrun (3.4%) -0.18% Alternative and renewable energy “malaise”
Source: FactSet; VanEck. Data as of June 30, 2021. Contribution figures are gross of fees, non-transaction based and therefore estimates only. Figures may not correspond with published performance information based on NAV per share. Past performance is not indicative of future results. Portfolio holdings may change over time. These are not recommendations to buy or sell any security.
We remain cautiously optimistic about the outlook for the oil and gas space in the near term. On one hand, U.S. oil and gas producers have shown, for nearly two years, their commitment to maintaining capital discipline—keeping expenditures in check and focusing primarily on generating what are, now, seemingly becoming record levels of free cash. On the other hand, WTI crude oil prices briefly eclipsed $75 a barrel in July and certainly appear at risk from a potentially meaningful reversion amid ongoing OPEC+ disputes and increasing drilling activity in the U.S.
Regarding OPEC+, several of the cartel’s key members (namely, Saudi Arabia, the United Arab Emirates and Russia) have recently reached yet another impasse on agreements over resumed production at pre-COVID-19 levels. Similar infighting last year, as may be recalled, eventually lead to an “opening of the spigots” with an accelerated crash in crude prices and sell off in associated equities.
While we believe the OPEC+ disputes are likely to linger on—particularly as oil and gas becomes increasingly phased out of the overall energy mix and participating countries take more of an individualized stance on how they should be handling their oil and gas assets—it remains a risk worthy of strong consideration, despite the fundamental attractiveness of oil names.
Longer term, however, the U.S. energy transition continues with the Biden Administration’s introduction of a nearly $1 trillion bipartisan deal, including money for the buildout of a national network of electric vehicle charging stations, purchases of electric buses and general upgrades to the U.S. power grid to allow for further integration of onshore wind and solar projects.
Inflation: Here now? Or to Come?
Imbedded within both higher energy prices and increased spending on the energy transition is none other than inflation!
The Fed’s indication of potential interest rate hikes in 2023, in our view, perhaps discounts all of the current inflationary pressures that exist within the financial system and that are likely to continue supporting higher commodity prices in the near term. In addition, we may be underestimating the significance of potential supply constraints that currently exist within areas such as battery mineral that are of vital importance to the energy transition and taking center stage in U.S./China geopolitical arena.
Average Annual Total Returns (%) as of June 30, 2021 2Q21† YTD 1 Yr 5 Yr 10 Yr Class A: NAV
7.44 18.95 76.56 4.07 -2.39 Class A: Maximum 5.75% load 1.26 12.11 66.40 2.85 -2.97 SPGINRTR Index1 11.12 32.72 45.92 2.03 -0.58 M2WDCOMP Index2 8.29 23.50 47.83 6.89 -0.15
The table presents past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect applicable fee waivers and/or expense reimbursements. Had the Fund incurred all expenses and fees, investment returns would have been reduced. Investment returns and Fund share values will fluctuate so that investor’s shares, when redeemed, may be worth more or less than their original cost. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at Net Asset Value (NAV). Index returns assume that dividends from index constituents have been reinvested. Investing involves risk, including possible loss of principal; please see disclaimers on the last page. Please call 800.826.2333 or visit vaneck.com for performance current to the most recent month end.
†Quarterly returns are not annualized. Expenses: Class A: Gross 1.62% and Net 1.38%. Expenses are capped contractually through 05/01/22 at 1.38% for Class A. Caps exclude acquired fund fees and expenses, interest, trading, dividends, and interest payments of securities sold short, taxes and extraordinary expenses.
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Prior to May 1, 2020, the fund was known as the VanEck Global Hard Assets Fund.
All company, sector, and sub-industry weightings as of June 30, 2021 unless otherwise noted. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Fund holdings will vary.
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