With natural resources stocks, broadly speaking, seen as value plays and demand still steady amid a mostly solid global economy, investors may want to consider relevant ETFs, such as the VanEck Vectors Natural Resources ETF (NYSEArca: HAP).
HAP is a based on an index of global commodity equities. The underlying VanEck Natural Resources Index tracks companies involved in the production and distribution of commodities and commodity-related products and services involved in agriculture, alternatives (water & alternative energy), base and industrial metals, energy, forest products, and precious metals.
“In our view, and by and large, shale oil and gas companies remained financially prudent and continued to optimize around free cash flow generation during the quarter,” said VanEck in a recent note. “This was reflected, once more, in the declining U.S. oil and gas rig count which, according to Baker Hughes, fell over 6% (from 860 to 805), ending the year down nearly 26%.”
Natural resources cover energy, metals, agriculture, timber, and water. They provide exposure to the basic economic building blocks, capitalize on supply and demand dynamics, and benefit from short- and long-term inflation drivers. Global populations and living standards are increasing, driving up the collective demand for goods. Additionally, we see that there is a widespread need for global infrastructure development and repair, which require natural resource consumption.
Hopping HAP
HAP offers some value because materials and energy sectors, which combine for almost two-thirds of the fund’s weight, are two of the most deeply discounted groups relative to the broader market. Another potential boon for HAP is the improving balance sheets found among exploration and production companies.
“Despite a year when returns from traditional energy equities failed to match those of broader markets, there are several notable, but perhaps poorly appreciated, features worth highlighting that may substantiate a more positive view of the industry,” according to VanEck. “Refrains of impeding global economic weakness aside, crude oil demand continues to grow steadily and hit record levels, with consumption growth in the fourth quarter of 2019, alone, estimated to surpass 2018’s fourth-quarter growth figures by nearly 2 million barrels per day.”
When it comes to miners, if management can control margins, the group could deliver solid outcomes for investors this year.
“We anticipate broader themes in the diversified mining sector to center around company managements’ continued focus on margins (versus volume) and the threat to supply growth,” notes VanEck. “Industry capex is expected to be between $25b to $30b in 2020 (versus a peak of nearly $80b in 2011), with a fairly even split between growth and sustaining capex. Across the pipeline, inventories also appear low.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
