Shining a Light on the Generational Value of Resources
August 29, 2022
Read Time 5 MIN
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.
Unless otherwise stated, portfolio facts and statistics are shown for Class A shares; other classes may have different characteristics.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
The views and opinions expressed are those of VanEck. Fund manager commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions. Any discussion of specific securities mentioned in the commentaries is neither an offer to sell nor a solicitation to buy these securities. Fund holdings will vary.
EV / EBITDA: Enterprise Value / Earnings Before Interest, Taxes, Depreciation and Amortization, also known as the EV/EBITDA multiple or enterprise multiple, is a ratio used to determine the value of a company. The enterprise multiple takes into account a company's debt and cash levels in addition to its stock price and relates that value to the firm's cash profitability. A low ratio relative to peers or historical averages indicates that a company might be undervalued. Dividend Yield: Dividend Yield—displayed as a percentage—is the amount of money a company pays shareholders for owning a share of its stock divided by its current stock price. The value indicates a simple rate of return in the form of cash dividends to shareholders and, generally speaking, can provide a way for investors to analyze how much return one may expect to receive per dollar they have invested.
All indices listed are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in any fund. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of a fund’s performance. Indices are not securities in which investments can be made.
Dax Global Agribusiness Index is an index which represents the performance of companies generating more than 50% of their revenues from one of the following sectors: livestock farming, production, processing and distribution of agricultural chemicals, ethanol and bio diesel as well as other agricultural equipment. EMIX Global Mining ex. Gold & Energy Index measure the returns of companies in the metal and mineral extraction industries excluding gold and energy companies. S&P Global 1200 Index is a free-float weighted index designed to measure the performance of large-cap stocks from major markets around the world—covering 31 countries and approximately 70% of global stock market capitalization. S&P 500 Index is widely regarded as the best single gauge of large-cap U.S. equities. The index is a float-adjusted, market-cap-weighted index of 500 leading U.S. companies from across all market sectors including information technology, telecommunications services, utilities, energy, materials, industrials, real estate, financials, health care, consumer discretionary, and consumer staples. S&P 500 Equal Weight Energy Index imposes equal weights on the index constituents included in the S&P 500 that are classified in the GICS® energy sector.
You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. The Fund is subject to risks associated with concentrating its investments in Canadian issuers, commodities and commodity-linked derivatives, commodities and commodity-linked derivatives tax, derivatives, direct investments, emerging market securities, ESG investing, foreign currency transactions, foreign securities, global resources sector, other investment companies, management, market, operational, small- and medium-capitalization companies and special purpose acquisition companies. The Fund’s investments in foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, including the takeover of property without adequate compensation or imposition of prohibitive taxation.
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