JAN VAN ECK: Hello. My name is Jan van Eck; I’m CEO of VanEck. I’m here today with Shawn Reynolds who is the Portfolio Manager of our Global Hard Assets Fund. Shawn, welcome, it’s exciting to talk about commodities in 2018.
SHAWN REYNOLDS: Thanks.
VAN ECK: We as a firm thought that commodities were bottoming at the beginning of 2016. We’re several years into this cycle now. Tell us what’s happened, what’s happening now, and what you see happening for the rest of 2018?
REYNOLDS: That cycle turn that we saw in the beginning of 2016 was really the result of multiple years of restructuring that went on throughout the entire resource space. That restructuring was really defined by restriction in capex. Part of that was due to the restriction in cash flow because we had lower commodity prices, but it was really an overt effort to restrain capex, focus on operational efficiencies, and really try to get yourself in better shape operationally, as well as financially. We saw some corrections and some strengthening in the balance sheets. As we entered into 2016 we started to see a really good response with regards to better operating performance and better financial performance. Now what you’re seeing (in ’16, ’17, and early-’18) is the beginning of the supply response of those commodities from the outcome of that lower capex.
Looking forward, you really have one of the best setups that I think we’ve seen since the mid-2000s. You have finally a tailwind in the macro sense with regards to better GDP outlook, the first tailwind we’ve had since the financial crisis in 2008/2009. You have the space very much under-owned due to some of the issues that we had in the pre-2016 period. But, more importantly, the industries and the companies are in great shape.
How was 2016 for the commodities market?
Commodities as an asset class usually respond to changes in currencies and interest rates. The dollar, being the reserve currency of the world, influences the commodities market the most. When the dollar appreciates, it affects the commodities market.
The start of 2016 wasn’t favorable for the commodities market. The dollar index (UUP) started strengthening. However, skepticism about the future of the US economy after the presidential elections made the dollar plummet.
The depreciating dollar and lower interest rates benefitted the commodities market in 2016. While the dollar index (UUP) plummeted 5% in 2016, the S&P GICS (GSG) gained 28%, the Dow Jones Commodity Index increased 25%, and the Bloomberg Commodity Index gained 11%. The chart above compares commodities indices’ performance against the dollar. Another factor that started benefitting the commodity space was cuts on capital expenditure to focus on production growth.
Although the dollar strengthened in 2017 and the Federal Reserve made gradual rate hikes, economic expansion across economies helped the commodities market maintain its performance last year. The chart above shows commodities’ performance last year. Most regained strength, with aluminum gaining the most and natural gas losing the most. Crude oil prices (USO)(USL) recovered after production cuts. Precious metals and base metals also performed well last year.
Let’s take a look at their performance last year and the outlook for 2018 in the next part of this series.