Fund Manager
Craig Porter
The majority of global equity markets ended the year with significant gains. Most surged off the excessively low valuations reached earlier in the year, fueled by low rates and cheap money. Although the worst appeared to be behind us, and many countries saw increasing manufacturing numbers, all was not well in certain pockets of the world. Late in the year Dubai announced they would not be able to make debt repayments only to be bailed out by one of their Arab Emirate brothers. As well, a number of the southern European countries such as Greece and Spain ran into economic problems and had their debt downgraded, sending their stock markets plummeting. So although we expect global economic growth this year, the road to recovery will not always be a smooth one, with bumps along the way being seen as buying opportunities.
The fourth quarter was a robust period for base metals. Continued government stimulus spending aimed at infrastructure projects, and better manufacturing numbers from a number of countries, created strong demand for the metals. As well, significant restocking of materials from China led to a tightening of supplies. As a result, the prices of copper, zinc and aluminum increased 20-30% in the fourth quarter alone. As the world returns to a period of economic growth, this sector should continue to outperform. Even before the recession hit very little exploration work was being carried out, and very few new mines were being built. As older mines are depleted, we expect to see a return to the supply bottlenecks that drove commodity prices significantly higher in the last cycle. This shortage of new opportunities has led to an increase in corporate activity, as cash rich, senior companies, many of them state owned, seek to boost their declining production profiles. We are also favourable on the prospects for coal and iron, as steel demand will pick up significantly as the emerging nations see a return to their industrial growth.
Both of the major commodities in the energy sector were quite strong with oil up 12% and natural gas up 15%. Oil spent most of the quarter above $75 per barrel. It will probably trade around this price until there is a significant pickup in global growth. Although there has been strong demand out of Asia, OPEC has significant spare capacity that can be brought on stream to meet any needs. We were surprised by the move in natural gas, particularly when inventory in North America remain about 15% above normal levels. Low industrial demand, coupled with new drilling technology, which has opened up previously uneconomic fields, has led to this glut of gas. Unless we have an extremely cold winter, we are likely to go through 2010 with excessive inventories putting a cap on any further rallies in the commodity price. We notice some interesting trends when looking at how the Canadian energy stocks performed this quarter. Among the stocks losing ground were some of the large integrated companies, such as Imperial Oil and Suncor, and the income trusts. The apparent lack of growth of these companies sent investors looking for greater returns, both in some of the newer resource areas of Canada such as the Bakken and Cardium plays, as well as offshore to areas such as South America and Asia.
Although the price of gold rose 9% in the quarter the TSX Capped Gold index was actually flat. This anomaly was caused by the fact that many of the larger producing companies saw their share prices hurt as they announced increasing cost structures and declining production profiles. The best performers were typically junior companies that were opening new mines, or those with sizeable deposits to be developed, which are viewed as take-over candidates. Investors continue to flock to gold as a safe haven investment due to the weak American government balance sheet and as protection against a fall in the U.S. Dollar. In fact, the largest gold fund in the US now holds more bullion than all but a few of the world’s central banks. However, it’s not just individuals buying gold. In November, India bought approximately $7 billion worth of gold from the IMF who was looking to sell some bullion to aid in third-world debt relief.
Overall, 2010 should see a return to global economic growth, which will be positive for the commodities sector. Governments are currently walking a fine line on when to turn off the stimulus taps and let natural growth take over. On a positive note, there still appears to be excessive cash sitting in the sidelines in money market funds. As confidence returns investors will start to embrace greater risk and invest in equities, helping to push valuations higher.
Craig Porter - Q4 2009 Commentary
Date Published
Related Fund(s)
Fund Manager
The majority of global equity markets ended the year with significant gains. Most surged off the excessively low valuations reached earlier in the year, fueled by low rates and cheap money. Although the worst appeared to be behind us, and many countries saw increasing manufacturing numbers, all was not well in certain pockets of the world. Late in the year Dubai announced they would not be able to make debt repayments only to be bailed out by one of their Arab Emirate brothers. As well, a number of the southern European countries such as Greece and Spain ran into economic problems and had their debt downgraded, sending their stock markets plummeting. So although we expect global economic growth this year, the road to recovery will not always be a smooth one, with bumps along the way being seen as buying opportunities.
The fourth quarter was a robust period for base metals. Continued government stimulus spending aimed at infrastructure projects, and better manufacturing numbers from a number of countries, created strong demand for the metals. As well, significant restocking of materials from China led to a tightening of supplies. As a result, the prices of copper, zinc and aluminum increased 20-30% in the fourth quarter alone. As the world returns to a period of economic growth, this sector should continue to outperform. Even before the recession hit very little exploration work was being carried out, and very few new mines were being built. As older mines are depleted, we expect to see a return to the supply bottlenecks that drove commodity prices significantly higher in the last cycle. This shortage of new opportunities has led to an increase in corporate activity, as cash rich, senior companies, many of them state owned, seek to boost their declining production profiles. We are also favourable on the prospects for coal and iron, as steel demand will pick up significantly as the emerging nations see a return to their industrial growth.
Both of the major commodities in the energy sector were quite strong with oil up 12% and natural gas up 15%. Oil spent most of the quarter above $75 per barrel. It will probably trade around this price until there is a significant pickup in global growth. Although there has been strong demand out of Asia, OPEC has significant spare capacity that can be brought on stream to meet any needs. We were surprised by the move in natural gas, particularly when inventory in North America remain about 15% above normal levels. Low industrial demand, coupled with new drilling technology, which has opened up previously uneconomic fields, has led to this glut of gas. Unless we have an extremely cold winter, we are likely to go through 2010 with excessive inventories putting a cap on any further rallies in the commodity price. We notice some interesting trends when looking at how the Canadian energy stocks performed this quarter. Among the stocks losing ground were some of the large integrated companies, such as Imperial Oil and Suncor, and the income trusts. The apparent lack of growth of these companies sent investors looking for greater returns, both in some of the newer resource areas of Canada such as the Bakken and Cardium plays, as well as offshore to areas such as South America and Asia.
Although the price of gold rose 9% in the quarter the TSX Capped Gold index was actually flat. This anomaly was caused by the fact that many of the larger producing companies saw their share prices hurt as they announced increasing cost structures and declining production profiles. The best performers were typically junior companies that were opening new mines, or those with sizeable deposits to be developed, which are viewed as take-over candidates. Investors continue to flock to gold as a safe haven investment due to the weak American government balance sheet and as protection against a fall in the U.S. Dollar. In fact, the largest gold fund in the US now holds more bullion than all but a few of the world’s central banks. However, it’s not just individuals buying gold. In November, India bought approximately $7 billion worth of gold from the IMF who was looking to sell some bullion to aid in third-world debt relief.
Overall, 2010 should see a return to global economic growth, which will be positive for the commodities sector. Governments are currently walking a fine line on when to turn off the stimulus taps and let natural growth take over. On a positive note, there still appears to be excessive cash sitting in the sidelines in money market funds. As confidence returns investors will start to embrace greater risk and invest in equities, helping to push valuations higher.