Focus on Fundamentals and Valuation, But Don’t Overlook Russia

What are the prevalent market trends in natural resources right now?

There are really three key issues to focus on in the natural resource world right now. The first is clearly the tug of war on demand between Western World recession and China reopening.

We really have to consider whether we're [the West] going into a hard landing, a soft landing or any sort of landing with regards to recession. And then we have to really look at the growth rate that we think that China is going to come out at, in terms of a rebound coming out of their COVID Zero policy.

The second issue really relies on supply. The discipline that we continue to see in terms of capital expenditure from the resource world is really, really locked in.

I was just down at a conference in Houston on the oil and gas space and that discipline is very, very apparent—not going to be let up. And, even though there's some skepticism around that, that skepticism has been there for a number of years. These companies have really, really held tightly to that discipline and are being rewarded for it, so we continue to think you're going to see a fair amount of that.

And then the third thing is the valuation of the resource space. No matter how you look at it, the resource space is the cheapest sector, whether it's valuation for the strength of balance sheet, dividend yields, or free cash flow yields. In fact, the oil and gas—or energy—sector and the mining sector are really amongst the highest yielding sectors throughout the market—and you can see that in terms of ordinary dividends, special dividends, variable dividends and share buybacks.

So you put those three together and we will really think that we see wind at your back with regards to the resource space right now.

What is the biggest risk the market is facing?

I think the biggest risk continues to be Russia. Last year at this time, right after the invasion, commodity prices and resource equity prices reacted to the perceived shortage that was going to come out of energy, from materials, from agriculture—all out of Russia. And incorporated that risk into its price discovery.

As the year went on, we got more and more comfortable with those supply concerns. Supply surprises coming out of Russia were actually stronger than we thought. But right now, it seems to be that we're kind of overlooking that that risks still exist and may get more severe as time goes on.

And so that, to us, is certainly the biggest risk in the whole sector. And we follow that every single day and feel that it's something that could lead to a real spike across the spectrum with regards to commodity prices.