Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Duncan Goodwin, the new head of global resources at Baring Asset Management, explains why he’s so positive on the outlook for resources stocks.
Resources sector equities are currently more attractive than direct investments in physical commodities and investors should focus on investing in ‘companies not commodities’ to benefit from strong opportunities and increasing global demand for resources.
The opportunity in resources equities is as strong as it has been for several years. Our positive outlook is based on the size of differential between what we see as positive company specific drivers versus a negative – often macro driven – consensus view.
After several years of a benign-to-negative commodity pricing backdrop and associated de-rating by shareholders, companies are finally taking action to improve margins and returns driven by self-help and or restructuring. To capture this market shift, we are putting more emphasis on the bottom-up element of stock selection and increasing the level of stock conviction in the Baring Global Resources Fund. That means a reduced emphasis on top-down portfolio construction with more risk taken at the stock level and reduced macro factor risk.
We are increasing the level of stock conviction by decreasing the number of investments held in our portfolio. With the right analysis, we believe it is possible to target investment opportunities offering superior returns and better prospects for positive earnings surprises.
Since March this year, the Baring Global Resources Fund has been tracked against a new composite benchmark, which broadens the investable universe of stocks in the Materials space beyond solely Metals and Mining to include subsectors such as chemicals, construction materials, containers and packaging and paper and forest products.
In addition to oil and gas production, the processing, marketing, storing and transporting of hydrocarbons is becoming an increasingly important factor for investors as countries and regions look to secure a stable and competitive source of energy to sustain economic growth.
Barings believes valuations for resources companies are currently trading below historical levels and look set to revert to their long term mean – making them very attractive for active investors with a strong understanding of the sector. On a longer term basis, continued population growth will drive absolute demand for natural resources, energy production and raw materials, which, in turn, will create growth opportunities for resources companies throughout the value chain.
Over the very long term, we are adamant that resource equities retain a valuable role in investment portfolios. As commodity prices are closely correlated with rises in consumer prices, investment in the resources sector has the potential to act as a hedge against inflation. We believe the opportunities in the sector are as strong as they have been for several years and expect a positive re-rating of the sector and associated gains for our resources fund irrespective of the macro.
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