ICG Sustainability Update – January 2021

The ICG Sustainability Update is our monthly published comment focused on energy-, waste-, raw material-, emission- and water-efficiency.

Resource Efficiency

Even after Covid-19 has wreaked havoc on almost everything else, the new year begins with surging growth for renewable energy. According to analysts, 2020 was the year of positive surprises for the environment in a way that very few saw coming. It was the breakout year in sustainability and infrastructure. Growth will likely continue into 2021, fuelled in part by last year’s major turning points. China has now committed to reaching carbon neutrality by 2060, putting the world’s biggest market for solar and wind power on the path to ramp up installations as it begins its next five-year plan. Some analysts have started predicting that the US power sector is approaching peak natural gas. That would leave room for solar-panel installations to build on the ongoing boom. Looking at solar in the US, residential installations dropped nearly 20% in the second quarter of 2020. According to Wood Mackenzie, the sector bounced back and the country added 19 gigawatts of total solar power. That is slightly more power than existed in the entire nation of Colombia at the end of 2019 according to BloombergNEF. Also, new battery-storage capacity in the US more than doubled in the third quarter of 2020 from the second – projections in California were a key reason for the surge. But not only in China and the US, also electricity from solar farms in Spain, Europe’s greatest solar potential, was up 60% in 2020 compared to 2019, generating over 15’000 gigawatt hours of power, according to data from the country’s grid manager. While the Southern European country still has about a third of the installed solar capacity as the EU’s leader Germany, Spain’s sector is set to grow at about double the Germans’ pace in the next two years. Overall, about 40% of the electricity in the first half o f 2020 in the EU came from renewable sources, compared with 34% from plants burning fossil fuels. On another note, President Joe Biden, pledges to make the US a global leader in the development and adoption of clean energy technologies. He has vowed to spend $400 billion on clean energy research and development over 10 years and a like amount in his first term on federal procurement of low-carbon technologies. His party’s effective control of both houses of Congress suggests some portion of Biden’s agenda can be enacted. Biden also can make significant policy changes through regulations and orders.

Rohstoffe im 2021 (and beyond): ein neuer Superzyklus am Horizont?

Lesedauer: ca. 4 Minuten

Fokus: Rohstoffe

Analysten, Investmentbanken und Medien berichten in jüngster Zeit vermehrt über steigende Rohstoffpreise – Investoren scheinen den Trend erkannt zu haben und schichten zunehmend ihr Kapital in den lang gemiedenen Sektor. Rohstoffe gehören trotz der kürzlich gestiegenen Preise noch immer zu den günstigsten Anlageklassen weltweit. Über das letzte Jahrzehnt verlor beispielsweise der GSCI Commodity Index über 60%. Analysten sind jedoch überzeugt, dass die Serie von negativer Performance ein Ende erreicht hat, und die Erholung der Preise nicht nur kurzfristig, sondern einen langfristigen Trend anstimmen. Experten zeichnen einen Vergleich zu den nuller Jahren und den Superzyklus von 2003 bis 2011, der auf Chinas Wirtschaftswachstum und dem damit verbundenen Hunger nach Rohstoffen aufbaute. Es gibt tatsächlich einige Anzeichen, die diese Prognose durchaus realistisch aussehen lassen. Einerseits gilt der schwache US-Dollar als treibende Kraft hinter den stark ansteigenden Preisen für Rohmaterialien – dieser hat bis Ende 2020 gegenüber den im Dollarindex enthaltenen Währungen deutlich verloren. Andererseits spielt die schnelle Erholung der Weltwirtschaft eine Rolle. Dank des Impfbeginns steigt die Hoffnung auf ein absehbares Ende der Pandemie, der neu gewählte US-Präsident Joe Biden verspricht weniger Spannungen in der Weltpolitik und hat grosse Pläne die «Green Revolution» kräftig voranzutreiben. Die Energiewende soll vor allem die Nachfrage nach Industrie- und einigen Edelmetallen über Jahrzehnte kräftig steigen lassen (siehe Blogbeitrag «Die Bedeutung der Energiewende für die Nachfrage nach Industriemetallen – ein unterschätzter Megatrend»).

Es gibt jedoch weitere, gewichtigere Faktoren, die einen langfristigen Einfluss auf die Rohstoffpreise haben und die Märkte strukturell verändern können.

Strukturbedingte Veränderungen

In einer kürzlich erschienen Studie von Goldman Sachs beleuchten Analysten den Case einer strukturellen Veränderung der Rohstoffmärkte, die die Phase eines neuen, langjährigen Bull-Marktes einläutet. Die Bank geht davon aus, dass der Aufwärtstrend für Rohstoffe auf drei Säulen beruht:

1. Revenge of the old economy: Aufgrund jahrelanger schwacher Performance von Rohstoffen und Rohstoffaktien wurde zu wenig Kapital für künftige Nachfrage und entsprechend für neue Projekte alloziert. Dieser Trend wurde aufgrund von ESG-Kriterien zusätzlich verschärft und durch COVID gar beschleunigt. Analysten gehen davon aus, dass bestehende Produktionskapazitäten die «V-förmige» Nachfrageerholung nicht bedienen können und das ohnehin begrenzte Angebot zusätzlich verknappt. Viele Rohstoffmärkte werden bereits im Jahr 2021 im Angebotsdefizit erwartet (z.B. Erdöl, Eisenerz, Kupfer, Zink oder Blei).
2. Nachfrage durch soziale Not: COVID läutet bereits eine neue Ära von Maßnahmen ein, die auf soziale Bedürfnisse anstatt auf finanzielle Stabilität abzielen. Dies könnte zu einem zyklisch stärkeren und rohstoffintensiveren Wirtschaftswachstum und entsprechend zu einem langfristigen Aufschwung der Nachfrage führen. Drei globale politische Trends haben das Potenzial, die weltweite Nachfrage nach Rohstoffen stark zu fördern: Umverteilungspolitik, Umweltpolitik und Initiativen im Hinblick auf Versorgungsketten. Von Chinas neuem 5-Jahres-Plan über Europas Green Deal bis hin zu Bidens Konjunkturprogramm streben die politischen Entscheidungsträger nach einem Jahrzehnt Politik, die auf finanzielle Stabilität abzielte, auf eine, die die sozialen Bedürfnisse befriedigt.
3. Neubewertung und Reflation: COVID hat zu einem massiven Anstieg der Staatsausgaben geführt, insbesondere in den USA, was den Dollar starkem Druck aussetzte. Obwohl der Dollar zu Beginn der Krise von einer «Flucht in die Sicherheit» profitierte, dürfte diese Unterstützung im Jahr 2021 nachlassen und eine positive Rückkopplungsschleife erzeugen, ähnlich wie in den 1970er und 2000er Jahren, als Öl und Gold zu historisch hohen Preisen notierten. Darüber hinaus sind die Inflationsrisiken aufgrund der oben genannten Richtlinien größer als zu jedem anderen Zeitpunkt seit den 1970er Jahren.

Für das Jahrzehnt 2020 wird erwartet, dass analog zu den 2000er Jahren ähnliche strukturelle Kräfte eine Rolle spielen könnten. Die massiven Investitionen in die «Green Revolution» dürfte einen vergleichbaren Umfang haben wie die Investitionen in den 1970er und 2000er Jahren.

Zusätzlich gehen Analysten von einem Umverteilungsschub in den entwickelten Ländern und einem starken Anstieg der Verbraucherausgaben in China aus. Darüber hinaus bieten die strukturellen Unterinvestitionen einen guten Nährboden für steigende Rohstoffpreise in den kommenden Jahren. Im Hinblick auf wirtschaftliche Zyklen, haben Rohstoffe besonders in Expansionsphasen besonders hohe Renditen erzielt. Momentan befindet sich die Wirtschaft zwischen Phase 2 (Erholung) und Phase 3 (Expansion) – doch selbst in der vierten Phase, der Abkühlung, haben Rohstoffe einen Vorteil gegenüber anderen Anlageklassen.

Rohstoffunternehmen

Angesichts prognostizierten, steigenden Rohstoffpreisen in den kommenden Jahren befinden sich Rohstoffaktien ebenfalls in einem günstigen Umfeld. Rohstofffirmen haben über die letzten 10 Jahre stark korrigiert und mussten sich neu erfinden. Die Rohstofffirmen haben jedoch während dieser Krise weitgehend ihre operative Widerstandsfähigkeit bewiesen und sind so gut positioniert wie nie zuvor. Die Kostenbasis war dynamischer als erwartet und konnte schnell und effizient reduziert werden. Um ihre Bilanzen zu sanieren, haben viele Rohstofffirmen über die letzten Jahre kaum in neue Rohstoffressourcen investiert. Dies widerspiegelt sich vor allem in den rekordhohen Gewinnen, Margen und im freien Cash Flow. Firmen erhöhen ihre Dividenden sowie ihre Aktienrückkaufprogramme – «Shareholder Return» geniesst bei den meisten Rohstoffunternehmen mittlerweile erste Priorität. Unserer Meinung nach sollte der Sektor nicht ausschliesslich über den Rückspiegel analysiert werden, denn der Wert dieser Firmen widerspiegeln eine Dekade von sehr moderatem Wachstum – die Zukunft ist jedoch vielversprechend. Nicht alleine die Popularität einer Unternehmung sollte den Wert bestimmen, sondern auch die Rentabilität und die Qualität der Erträge, welche generiert werden. Die Bewertung des Sektors ist noch immer auf historischen Tiefstständen und bietet eine attraktive Möglichkeit, vom künftigen Wachstum zu profitieren.

Die Independent Capital Group offeriert Anlegern drei aktiv verwaltete Fonds zu den Rohstoff-Subsektoren «Industrie Metalle», «Edelmetalle» und «Energie». Gerne können Sie über den untenstehenden Button mehr Informationen zu unseren Fonds anfordern.

Sources: Independent Capital Group, Haver, World Bank, Goldman Sachs Investment Research, NZZ

ICG Sustainability Update – December 2020

The ICG Sustainability Update is our monthly published comment focused on energy-, waste-, raw material-, emission- and water-efficiency.

Resource Efficiency

Energy efficiency has struggled to keep its momentum during a global pandemic and an economic recession, however some countries still prioritize energy efficiency as an important resource to help reduce household and business energy bills, create jobs, and reduce emissions. Researchers concluded that adding insulation or installing a new heating system can lower costs but also reduce stress on the grid at times of peak demand. Looking into the New Year, the new president-elect has vowed to re-join the Paris climate accord on his first day at the office, and convene a climate summit of world leaders. He has insisted that he will create a more ambitious national target for cutting emissions that would put the country on a sustainable path to achieve net-zero emissions no later than 2050. At the same time, Biden plans to start a new round of negotiations between the federal government, the US auto industry and California officials to significantly improve the fuel efficiency of cars, pickup trucks and sport-utility vehicles – the largest source of the nation’s emissions. He will expedite federal permits for offshore wind projects planned and seek to stop the expansion of drilling on public land. Also, he has promised to invest around 40% of clean energy funding in historically disadvantaged communities and ensure wider access to everything from safe drinking water to sustainable jobs in neighbourhoods that have long lacked both. On another note, in September last year, China’s president, Xi Jinping, announced that China wants net carbon emissions to peak before 2030 and to be carbon-neutral before 2060. Japan and South Korea followed with their own ambitious commitments. Net-zero pledges now cover almost 60% of the world’s emissions. As a big source of carbon emissions, the various net-zero pledges place coal squarely in their crosshairs. While the commitments are bold, getting to carbon neutrality will be a challenge, especially in China, the world’s largest emitter of carbon. Even with China’s rapid deployment of renewables in recent years and improvements in energy efficiency, it’s still heavily dependent on the burning of coal. About 90% of China’s emissions come from electricity and heat production, industry and transport. With so many details still to be released in terms of how China plans to achieve carbon neutrality, many questions linger over coal’s future in a country where it still accounts for more than 60% of its electricity generation mix. According to analysts, coal demand in China is already flat. It’s likely to remain at a plateau for some years. The country aims to continue quite fast GDP growth in the next three decades, so it means it wants to be richer but also at the same time cleaner, greener and lower-carbon. China needs to decouple GDP growth with its energy demand and its carbon emissions and that will require a very significant transition in its growth engines as well as its energy supply structure.

ICG Commodity Update – December 2020

The ICG Commodity Update is our monthly published comment on energy, industrial metals and precious metals market.

Energy

At the end of 2020 Brent crude prices topped $50/bl for the first time since early March. The latest milestone in a remarkable oil-market recovery fuelled by supply curtailments and drivers returning to the road. Its recent rally shows how hopes for coronavirus-vaccine distribution and economic-stimulus programs are helping to heal global energy markets. Indeed, the oil sector has been hit harder than almost any other by the pandemic. Crude prices fell from near $70/bl at the beginning of 2020 to below $20/bl in April as lockdown slashed fuel demand. The crisis reached its crescendo in April, when the US oil price WTI briefly turned negative. After a short but damaging price war, OPEC and Russia enacted record supply cuts to stabilise markets. Companies were forced to rip up investment plans while European energy majors began to look to a greener future. Oil and gas companies wrote down +$150bn combined in the first three quarters of 2020, the most for that nine-month period since at least 2010. Defaults by US oil and gas producers are set to outstrip all other sectors again in 2021 according to Fitch. There are, however, signs of a nascent recovery after the turbulence of 2020. Crude has crept back above $50/bl and some investors are betting that the cycle is turning, even as expectations for peak demand loom over the horizon. On the demand side, oil consumption is expected to rise by the most on record in 2021. The IEA expects demand to rise by almost 6mboe/d but will average 96.9mboe/d, still below the pre-pandemic record of 100mboe/d in 2019. On the supply side, the outlook is more complex. US shale stabilised in the 2H 2020 but the days of gangbuster growth are behind it. Some estimate oil project investment will never fully recover to pre-virus levels. The industry will continue to consolidate to reduce costs and assure investor returns. Finally, most analysts expect the oil market to stay in deficit during 2021. However, the market rebalancing remains heavily dependent upon the output management of OPEC+ and OPEC’s decision to assess the market on a monthly basis will undoubtedly drive volatility. Nevertheless, we are persuaded that investors are still looking to rotate into cyclical commodities such as oil and natural resource equities. Valuations continue to look very attractive with a P/CF of 3.9x and a healthy FCF yield of +10% this year. We think that the reduced cost structures and promised capital restraint should set the sector up well to finally deliver on long-awaited capital return growth in 2021+, and as a result, should drive a further catch-up move in the broader sector.

Industrial Metals

According to analysts, commodities are predicted to enter a long-term bull market and draw comparison to the last super cycle that started in the early 2000s on a China-driven demand boom. Especially copper, considered an economic barometer, is essential for decarbonization. Electric vehicles use up to four times more of the metal than internal combustion engines, while renewable energy uses at least three times more copper and as much as 15 times more than traditional power production. Copper has posted nine straight monthly gains, the longest run since 1994. Prices have surged about 80% from a low in March, helped by China’s appetite for commodities and supply snags early on in the Covid-19 pandemic. Analysts expect further gains amid a possible production deficit, weaker dollar and the metal’s role in green technology – interest in copper investment increased on the back of the “green revolution” recently, Credit Suisse for example stated the metal is one of their favorite ESG themes and states that mining is one of their strategists’ top three overweight’s. They see demand drivers to remain robust or accelerate for the whole sector into 2021. When looking at commodities demand, there is no way around China. Chinese commodity demand ended the year on some very high notes marking a stunning recovery from the hammer blow of the pandemic that landed in February. Roaring demand and supply constraints in the world’s biggest consumer are feeding a broader turnaround in global prices. Another good example is iron ore, where the market is tight, and the price increased from $86/t at the start of 2020 to >$150/t by year-end. Key indicators in China such as land purchases, infrastructure bond issuances and stimulus for vehicles / white goods provide support for Chinese steel demand, coming from the infrastructure, real estate and manufacturing sectors. Analysts expect Chinese steel production to grow again in 2021, after an already very strong 2020. Analyst expect the iron ore market to stay in deficit during 2021. On top of that, other important iron ore consuming regions like South East Asia and Europe are likely to recover in 2021, given fiscal stimuli and economic normalization post COVID-19. Overall, industrial metals prices are making a buoyant start to the New Year on vaccine rollouts worldwide which brightens outlook for the economy and with that, the demand for metals. All this results in Mining companies having for 2021 record dividend yields (IMC at 3%), record FCF yields (IMC at 8%) and this still with an attractive valuation (EV/EBITDA at 6.2x for the IMC).

Precious Metals

Gold lost -5.4% in November as investors bolting out of precious metal exchange traded funds in anticipation of the COVID-19 vaccines have outweighed the impact of a record volume of bonds trading at negative yields. Gold’s current weakness is accompanied by a depreciating dollar, which normally has an inverse price correlation with the yellow metal. Gold has had a stellar year, rising 16% year-to-date. However, the recent fall has been fast and furious but not without precedent. In 2H11, a short-lived revival in US real interest rates, linked to policy uncertainties as well as communication missteps by the Federal Reserve, triggered profit-taking from its then record high. This time, gold prices have sold off on earlier-than-expected COVID-19 vaccine progress. Uncertainty about the Fed’s next steps and improving macro data also played a part. On both occasions, there was one common theme – outflows from exchanged-traded funds, which is a frequent reaction to diminished appetite for safe havens. Also, according to Goldman Sachs, COVID has led to a massive rise in government spending, particularly in the US where the dollar was already facing headwinds. Although the dollar got a boost from a flight to safety at the beginning of the crisis, this support is likely to fade in 2021 and beyond, creating a positive feedback loop similar to what it did during the 1970s and 2000s when oil and gold reached historical highs. In addition, inflation tails risks are greater than at any other time since the 1970s. Similar to after the global financial crisis, gold markets will likely be pulled higher as reflation concerns grow with the recovery and investors look to buy the currency of last resort. Economists believe near-term breakeven inflation has further room to run, supporting higher prices for precious metals and commodities in general. Gold miners suffered this month but we think the investment case remains intact. We had several “virtual” conferences with CEOs und industry experts that agree that the vaccine news should be positive for the economy, the companies and of course for the humans in general. Back to normality also is positive for the precious metals sector. Indeed, most companies still generate record high free cash flow and are distributing decent dividends. This has been visible on the last earning season and we expect the PMC portfolio to generate a dividend yield at least twice the universe going forward.

ICG Commodity Update – November 2020

The ICG Commodity Update is our monthly published comment on energy, industrial metals and precious metals market.

Energy

We see a light at the end of the tunnel. Crude oil prices are trading at their highest levels since early March, supported by positive market sentiment as a result of vaccine news and strong oil demand in Asia. Meanwhile, oil markets moved from oversupplied to undersupplied in 3Q 2020. The recent wave of COVID infections sweeping Europe and US has surprised by its intensity, leading to renewed lockdowns. Importantly, this is only a speed bump in the general expectation of a sharp tightening of oil fundamentals through 2021, driven by a recovery in demand boosted by vaccines and rapid testing as well as by the collapse in upstream investment and change in the shale reaction function. The winter COVID wave will delay but not derail the oil market rebalancing. Most analyst expect the market to stay undersupplied during 2021. Further to that, we think that most people underestimate the difficulties to increase the oil market supply chain after years of under-investment. Especially this year and in response to COVID, ESG issues have further reduced investment in the old economy. Goldman Sachs even thinks, that that this recovery in commodity prices will actually be the beginning of a much longer structural bull market. COVID is already ushering in a new era of policies aimed at social need instead of financial stability. This will likely create cyclically stronger, more commodity-intensive economic growth that should create the elusive cyclical upswing in demand. COVID has led to a massive rise in government spending, particularly in the US where the dollar was already facing headwinds. Although the dollar got a boost from a flight to safety at the beginning of the crisis, this support is likely to fade in 2021 and beyond, creating a positive feedback loop similar to what it did during 1970s and 200s when oil and gold reached historical highs. In addition, inflation tail risks are greater than at any other time since 1970s. Looking at the 2020s, Goldman believes that similar structural forces to those which drove commodities in the 2000s could be at play. Energy companies had a superlative month. The S&P 500 energy sector had its best month on record. This lagging YTD performance is driving the “catch up” trade as investors seek out laggard sectors which have not participated in this year’s equity rally. We think the rally may continue into 2021 as most analysts are. Nevertheless, is still a long way to “pre-COVID” levels, but we are persuaded that the whole oil and gas industry will come out much stronger. The oil and gas business has always been full of booms and busts. But this time companies have adapted very fast to the new price environment and there have been also several M&A showing efforts to consolidate and improve operations. Further to that, several oil and gas majors, mainly European, have started to improve its ESG perception and this is also very important and positive.

Industrial Metals

Copper extended a rally after capping the longest stretch of monthly advances in almost a decade, as China’s recovery continues and supply risks stack up. Caixin’s China November manufacturing purchasing managers’ index rose to the highest in a decade. That’s the latest indicator highlighting the economic strength in the top metals consumer, after the official PMI beat market expectations and showed the nation’s economic rebound is gathering pace. According to analysts, this year’s rally is starting to resemble the spike in prices seen in the early 2000s as a surge in Chinese orders ushered in the start of the commodities supercycle. Metals surged on a wave of bullish drivers including a weaker dollar, vaccine optimism, and a global move toward low-carbon power sources. Risks of supply disruptions in key mining countries also tightened the market, with analysts warning of unmanageable global deficits in the coming years. According to Goldman Sachs, the streak of poor commodity returns has reached an end in the aftermath of the Covid crisis. The bank believes that this recovery in commodity prices will actually be the beginning of a much long structural bull market driven by three key themes. 1) Under-investment in the old economy due to a decade of poor returns, especially in energy where ESG issues have further reduced investment, was accelerated during 2020 due to COVID, leaving inadequate production capacity to meet a V-shaped vaccine driven demand recovery. 2) COVID is already ushering in a new era of policies aimed at social need instead of financial stability. This will likely create cyclically stronger, more commodity-intensive economic growth that should create the elusive cyclical upswing in demand. Three global initiatives have the potential to REV the global demand for commodities: Redistributional policies, Environmental policies and Versatile supply chain initiatives. 3) COVID has led to a massive rise in government spending, particularly in the US where the dollar was already facing headwinds. Although the dollar got a boost from a flight to safety at the beginning of the crisis, this support is likely to fade in 2021 and beyond, creating a positive feedback loop similar to what it did during 1970s and 200s when oil and gold reached historical highs. In addition, inflation tail risks are greater than at any other time since 1970s due to the REV policies above. Looking at the 2020s, Goldman believes that similar structural forces to those which drove commodities in the 2000s could be at play. Not only can the green capex increase be as big as BRIC’s investment 20 years ago, but the redistributive push in DMs, and in China this time, is likely to lead to a large boost to consumer spending, comparable to the lending-fueled consumption increase in the 2000s. Finally, similar to 2000s, there is structural under-investment in supply of almost all commodities.

Precious Metals

Gold lost -5.4% in November as investors bolting out of precious metal exchange traded funds in anticipation of the COVID-19 vaccines have outweighed the impact of a record volume of bonds trading at negative yields. Gold’s current weakness is accompanied by a depreciating dollar, which normally has an inverse price correlation with the yellow metal. Gold has had a stellar year, rising 16% year-to-date. However, the recent fall has been fast and furious but not without precedent. In 2H11, a short-lived revival in US real interest rates, linked to policy uncertainties as well as communication missteps by the Federal Reserve, triggered profit-taking from its then record high. This time, gold prices have sold off on earlier-than-expected COVID-19 vaccine progress. Uncertainty about the Fed’s next steps and improving macro data also played a part. On both occasions, there was one common theme – outflows from exchanged-traded funds, which is a frequent reaction to diminished appetite for safe havens. Also, according to Goldman Sachs, COVID has led to a massive rise in government spending, particularly in the US where the dollar was already facing headwinds. Although the dollar got a boost from a flight to safety at the beginning of the crisis, this support is likely to fade in 2021 and beyond, creating a positive feedback loop similar to what it did during the 1970s and 2000s when oil and gold reached historical highs. In addition, inflation tails risks are greater than at any other time since the 1970s. Similar to after the global financial crisis, gold markets will likely be pulled higher as reflation concerns grow with the recovery and investors look to buy the currency of last resort. Economists believe near-term breakeven inflation has further room to run, supporting higher prices for precious metals and commodities in general. Gold miners suffered this month but we think the investment case remains intact. We had several “virtual” conferences with CEOs und industry experts that agree that the vaccine news should be positive for the economy, the companies and of course for the humans in general. Back to normality also is positive for the precious metals sector. Indeed, most companies still generate record high free cash flow and are distributing decent dividends. This has been visible on the last earning season and we expect the PMC portfolio to generate a dividend yield at least twice the universe going forward.