Fund Manager
Craig Porter
Global stock markets continued to recover in the third quarter, bouncing off the recessionary lows seen earlier this year. The S&P/TSX index was up a further 9.8% in the third quarter, bringing its year-to-date performance to up 27%. On a positive note, we have some seen some breadth in the recovery with half of the sub sectors on the S&P/TSX up over 25% YTD. The second quarter earnings period was quite strong with many companies easily surpassing lowered expectations. However, most of the gains in profitability came from cost cutting and rationalizations. For the rally to continue, investors will want to see increases in sales and revenue in the third quarter numbers, to give further signals of an economic recovery.
Although stock markets have performed well, we still see a fragile recovery in global markets. Governments around the world are performing a balancing act on deciding when it’s appropriate to turn off the stimulus packages and let real economic growth take over. In the U.S. and Canada, and most industrialized countries around the world, central bankers are maintaining ultra low interest rate environments. It may also be some time before the consumer comes back to bolster the market with unemployment in the U.S. running close to 10%. Couple that with the fact that incentive programs for buying automobiles and housing in the U.S. are coming to an end, and you realize that markets may have to find another a new key driver going forward.
The price of oil has traded around the U.S. $70 per barrel level for most of the summer. Worldwide supply and demand remain fairly well in balance, as OPEC has restricted supply for the past few years. Political risk, as always, remains a factor in the oil markets, with tensions in Nigeria and fears of Iran’s nuclear program adding support to price. Once we get back into a world growth scenario we may start to see prices rise again, as there have been few large discoveries made in the last decade, and few countries have idled spare capacity. Many counties such as Venezuela and Mexico have seen their production come off quite sharply the last few years, due to mismanagement of their oil fields. There has also been a sharp increase in first time car buyers adding to gasoline demand from emerging countries such as China, which is now selling over one million cars a month. Natural gas prices in the U.S. surprisingly rallied 25% in the third quarter. However, a number of factors point to a weak short-term outlook for natural gas. Inventory levels in North America are at all-time highs and remain approximately 16% above where they normally are at this time of year. With the increase in price, gas is no longer able to compete with coal for electrical generation, so one area of demand should drop off. Over the past couple of years, advancements in drilling technology have significantly lowered the cost of finding gas, adding to reserves. If there is not a strong rebound in industrial production, or an extremely cold winter, we are likely to go into next spring’s injection season with excessive inventories setting up next year as a continued period of weak gas prices.
The price of gold rallied sharply and closed the quarter above U.S. $1000 per ounce. Everything seems to be going in gold’s favour right now. Investors have been snapping gold up as a safe haven investment and as protection against a falling U.S. dollar. On the supply side, mine production has been falling continuously through this decade, and the world’s central banks have limited their exposure. In fact, certain countries such as China have been accumulating gold in an effort to diversify out of U.S. dollars. We are also entering the seasonally strong demand period for gold as jewelers start to buy gold to fabricate product for the various end-of-year holidays. As the ultimate sign of the rally in gold, Barrick Gold the world’s largest producer, decided to close out their 9.5 million ounce hedge book, based on their conviction that gold is going higher. Although we are positive on gold in the short term, longer term we feel that as an economic rally takes hold, investors will start to seek more risk and will shift some of their investment dollars out of gold and into equities.
Most base metals performed quite strongly this summer, as government stimulus packages and Chinese restocking led demand higher. Copper and zinc for example were both up over 20%. If, as we feel, the world reenters a growth phase, we will once again experience the supply bottlenecks that drove prices higher in the last cycle. Very few new mines have opened, and with little exploration being carried out during the last few years, it will be some time before any significant production comes on-stream. Those companies that have quality assets will increasingly become acquisition targets, as it is currently easier and cheaper to acquire assets than to grow them organically.
Despite the cautiousness of the recovery, there are some positive signals on the horizon. Industrial production in China remains quite strong, increasing 12% over the previous year, spurring demand for many commodities. We have also started to see some stabilization in the credit markets. Bank lending, which seized up in late 2007 and contributed to the recession, has started to flow once again. As well, numerous corporate debt offerings have been well received by the investing public, as default fears start to fall by the way side. Although there will be some bumps along the way to economic recovery, we remain fully committed to the resource sector and its potential in a strong, growing global economy.
Craig Porter
Craig Porter - Q3 2009 Commentary
Date Published
Fund Manager
Global stock markets continued to recover in the third quarter, bouncing off the recessionary lows seen earlier this year. The S&P/TSX index was up a further 9.8% in the third quarter, bringing its year-to-date performance to up 27%. On a positive note, we have some seen some breadth in the recovery with half of the sub sectors on the S&P/TSX up over 25% YTD. The second quarter earnings period was quite strong with many companies easily surpassing lowered expectations. However, most of the gains in profitability came from cost cutting and rationalizations. For the rally to continue, investors will want to see increases in sales and revenue in the third quarter numbers, to give further signals of an economic recovery.
Although stock markets have performed well, we still see a fragile recovery in global markets. Governments around the world are performing a balancing act on deciding when it’s appropriate to turn off the stimulus packages and let real economic growth take over. In the U.S. and Canada, and most industrialized countries around the world, central bankers are maintaining ultra low interest rate environments. It may also be some time before the consumer comes back to bolster the market with unemployment in the U.S. running close to 10%. Couple that with the fact that incentive programs for buying automobiles and housing in the U.S. are coming to an end, and you realize that markets may have to find another a new key driver going forward.
The price of oil has traded around the U.S. $70 per barrel level for most of the summer. Worldwide supply and demand remain fairly well in balance, as OPEC has restricted supply for the past few years. Political risk, as always, remains a factor in the oil markets, with tensions in Nigeria and fears of Iran’s nuclear program adding support to price. Once we get back into a world growth scenario we may start to see prices rise again, as there have been few large discoveries made in the last decade, and few countries have idled spare capacity. Many counties such as Venezuela and Mexico have seen their production come off quite sharply the last few years, due to mismanagement of their oil fields. There has also been a sharp increase in first time car buyers adding to gasoline demand from emerging countries such as China, which is now selling over one million cars a month. Natural gas prices in the U.S. surprisingly rallied 25% in the third quarter. However, a number of factors point to a weak short-term outlook for natural gas. Inventory levels in North America are at all-time highs and remain approximately 16% above where they normally are at this time of year. With the increase in price, gas is no longer able to compete with coal for electrical generation, so one area of demand should drop off. Over the past couple of years, advancements in drilling technology have significantly lowered the cost of finding gas, adding to reserves. If there is not a strong rebound in industrial production, or an extremely cold winter, we are likely to go into next spring’s injection season with excessive inventories setting up next year as a continued period of weak gas prices.
The price of gold rallied sharply and closed the quarter above U.S. $1000 per ounce. Everything seems to be going in gold’s favour right now. Investors have been snapping gold up as a safe haven investment and as protection against a falling U.S. dollar. On the supply side, mine production has been falling continuously through this decade, and the world’s central banks have limited their exposure. In fact, certain countries such as China have been accumulating gold in an effort to diversify out of U.S. dollars. We are also entering the seasonally strong demand period for gold as jewelers start to buy gold to fabricate product for the various end-of-year holidays. As the ultimate sign of the rally in gold, Barrick Gold the world’s largest producer, decided to close out their 9.5 million ounce hedge book, based on their conviction that gold is going higher. Although we are positive on gold in the short term, longer term we feel that as an economic rally takes hold, investors will start to seek more risk and will shift some of their investment dollars out of gold and into equities.
Most base metals performed quite strongly this summer, as government stimulus packages and Chinese restocking led demand higher. Copper and zinc for example were both up over 20%. If, as we feel, the world reenters a growth phase, we will once again experience the supply bottlenecks that drove prices higher in the last cycle. Very few new mines have opened, and with little exploration being carried out during the last few years, it will be some time before any significant production comes on-stream. Those companies that have quality assets will increasingly become acquisition targets, as it is currently easier and cheaper to acquire assets than to grow them organically.
Despite the cautiousness of the recovery, there are some positive signals on the horizon. Industrial production in China remains quite strong, increasing 12% over the previous year, spurring demand for many commodities. We have also started to see some stabilization in the credit markets. Bank lending, which seized up in late 2007 and contributed to the recession, has started to flow once again. As well, numerous corporate debt offerings have been well received by the investing public, as default fears start to fall by the way side. Although there will be some bumps along the way to economic recovery, we remain fully committed to the resource sector and its potential in a strong, growing global economy.
Craig Porter