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.

ICG Systematic Equity Fund CH Update – November 2020

Das ICG Systematic Equity Fund CH Update ist ein monatlich erscheinender Kommentar über den Schweizer Markt und zum Fonds

• Die globalen Aktienmärkte setzen ihren Wahnsinnslauf seit dem Ausbruch der Corona-Krise fort. Der SPI erzielt die zwölftbeste Monatsperformance seit 1987
• Der Durchbruch bei der Suche nach einem Corona-Impfstoff führt zu heftigen Sektor- und Stilrotationen: Zykliker mit starken Preisausschlägen und günstigen Bewertungen sehen sich einer schlagartig zunehmenden Nachfrage gegenüber
• Das fundamentale Umfeld spricht weiterhin klar für Aktienanlagen – Positiver Aufwärtstrend in der Realwirtschaft wird unterstützt von einer rekordhohen Risikoprämie
• Auch Marktpsychologie gibt Aktien Rückenwind, Signale, die vor einem übertriebenen Optimismus der Marktteilnehmer warnen, nehmen aber zu
• Die im Oktober gesenkte Aktienquote wird bis am 13. November wieder auf 100% erhöht
• Stilmodelle mit aggressiver Ausrichtung – überdurchschnittliches Exposure ggü. Aktien mit hoher Volatilität und günstiger Bewertung
• Übergewicht in Aktien aus dem Industriegüterbereich wird ausgebaut
• Die unterdurchschnittliche Aktienquote zu Beginn des Berichtsmonats wirkt der guten Titelselektion entgegen und bremst die November-Performance des Systematic Equity Fund CH im Vergleich zum SPI

ICG Commodity Update – October 2020

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

Energy

Oil prices slid 10% last week, their largest weekly drop since April and have fallen to their lowest level in 5 months. Analysts worry that slumping demand will combine with higher production to again oversupply the market, prompting outsize moves in both directions. Indeed, the European measures are set to shave ~2mboe/d of oil demand in Nov-Dec, said GoldmanSachs. That equates to 2% of pre-coronavirus global demand and would take European oil demand back to levels last seen in May, when much of the continent was emerging from lockdown. On the other side, supporting much of the surge in EM Asia’s nominal GDP growth has been China’s strong recovery, as the IMF noted. This partly explains China’s surge in crude oil imports during the COVID-19 pandemic, which, given their parabolic trajectory, exceed pre-COVID-19 levels. China’s crude imports for 1Q-3Q20 are up 13% YoY, and average 11.1mboe/d. Turning to the supply side, most analysts continue to expect that OPEC will do whatever it takes to ensure prices resume their upward trend as demand picks up in 2021. Therefore expectations increase for a delay to quota easing in Jan 2021 by 3 months. Therefore to sum up, the oil market is in a delicate balance. Prices are being pulled up by the strong oil demand recovery in China and India, high compliance by OPEC and its allies, and hurricane disruptions to US Gulf of Mexico production, and pulled down by regional restrictions across Europe and recovering oil production in Libya. However, the long awaited oil and gas consolidation wave has finally arrived on the oil patch! The 6 largest US producers now account for half of Permian production, up from just 35% in early 2020 and the highest level of concentration since 2002. Indeed, low commodity prices and tightening financing conditions have historically led to consolidation and market repair in the oil and gas sector, with the late-1990s a good example. History is starting to repeat itself, with 4 material M&A transactions announced over the past 3 months (the ECF participated in two of them). However, this time the M&A drivers are different but the outcome will be similar: consolidation driven by cost-cutting and capital efficiency, repairing the sector’s damaged returns from a 50-year low and rebuilding investor confidence. 3Q20 results may start this healing process as the group should generate post-dividend FCF, which hasn’t been achieved on an annual basis since 2005, while holding oil production flat. In general, the valuation of oil companies and the overall market sentiment versus the oil industry is at its lowest point in decades. However, the oil business has always been full of booms and busts. Nevertheless, we think the oil age is far from over. It may be in decline, and for the long-term health of our planet that may not be a bad thing, but oil as a commodity will be needed for the foreseeable future – as an absolutely necessary part of providing energy to the world.

Industrial Metals

Copper stayed relatively flat in October as fresh lockdowns in Europe cast doubt over the economic recovery and the upcoming US election fueled uncertainty in broader markets. Large swathes of Europe are entering lockdown as governments conclude tougher action is needed to counter the coronavirus. Concern that economic growth will be hampered by further restrictions dragged crude prices and commodity currencies lower. The virus concerns are overshadowing a brightening outlook from manufacturing activities in China. Both private and official Chinese gauges beat estimates to show the country’s economic recovery is going strong. Especially in focus is iron ore as data on China’s economy and the nation’s mammoth steel industry pointed to a brighter outlook. Steel companies from China expecting robust demand for steel and steel products to last, underpinned by the auto and home-appliances sector. According to investment bankers, lots of conversation about takeovers are going on in the mining space. Miners are engaging in plenty of takeover talks despite a tepid year for acquisitions, but few deals will get done without greater clarity on the economy and an ebbing of Covid-19. For years, mining executives have been saying that consolidation in the industry is inevitable given the abundance of companies and increasing difficulty of finding new high-grade deposits. Mining companies have been involved in about $52 billion of acquisitions this year, according to Bloomberg data. That’s less than half the value of deals seen during industry consolidation in the mid-2000s and following the end of the financial crisis. The inability of companies to undertake due diligence amid Covid-19 restrictions and huge price volatility in the metal markets have hampered this year’s activity, Barclay said. According to the Bank, if an economic recovery takes hold and strengthens demand for commodities, a very busy year is anticipated. On another note, industrial metals are poised to rally mid- to long-term, as the world enters the age of “critical metals”. Mining has a key role to play in decarbonizing tomorrow’s world. The green electrification sector has received a material boost from new policy developments so far in 2020. A combination of Europe’s Green Deal, China’s 2060 neutrality goal and Biden’s clean energy plan (if elected) will all require significant investments in both the renewable energy (solar, wind,etc.) and EV-related sectors (charging infrastructure, cars) – all these sectors rely heavily on industrial metals. Independent Capital Group has published an extensive fundamental analysis about this megatrend on it’s blog, which can be accessed via www.independent-capital.com/die-bedeutung-der-energiewende-fur-die-nachfrage-nach-industriemetallen-ein-unterschatzter-megatrend

Precious Metals

Gold has given up ground during the presidential race’s closing stages, dropping for a third straight month in October, the longest losing run for the traditional haven since April 2019. Still, while prices have pulled back from the record set in August, holdings in bullion-backed exchange-traded funds remain close to an all-time high as investors track the US contest, the course of the coronavirus pandemic, and central bank action. According to analysts, the risk of prolonged political uncertainty following the US presidential vote this week could likely benefit gold if there is no clear winner announced on election night. On the company side, AngloGold joins other gold miners in increasing dividends. The company will double its dividend pay-out ratio after gold prices surged this year and the company’s borrowings fell to the lowest in nearly a decade. AngloGold, the world’s third-largest gold producer said it will now return 20% of free cash flow before growth capital to shareholders. Newmont, the world’s largest gold miner, increased its dividend by 60%. The company is planning to pay out 50% to 60% of its incremental free cash flow generated from gold prices above $1’200 an ounce. It’s current dividend yield stands at 2.7%, which is above the S&P 500’s yield of about 1.7%. The club of dividend increasing gold companies is also joined by Yamana Gold, which hikes dividend by 50% before listing on London Stock Exchange, Agnico Eagle Mines with an increase of 75% and Kirkland, which increases its quarterly dividend by 50%. It often has been hard for gold mining companies to appeal beyond a dedicated group of commodity-oriented investors because of the perception that they are wasting assets with mediocre management and poor capital discipline – this perception should slowly change over time as gold companies prove that they are cash-flow generating and dividend paying. Analysts expect that a growing gold price presents significant upside to dividends and the first hikes could be one of many to come.

ICG Systematic Equity Fund CH Update – Oktober 2020

Das ICG Systematic Equity Fund CH Update ist ein monatlich erscheinender Kommentar über den Schweizer Markt und zum Fonds

• Die anziehenden Corona-Fälle in der westlichen Hemisphäre, Uneinigkeit in Washington bezüglich neuer konjunktureller Stimulierungspakete sowie die bevorstehenden Präsidentschaftswahlen versetzen den Aktienmärkten gegen Ende Oktober einen Dämpfer
• Heftige Sektor- und Stilrotationen zeugen von steigender Nervosität unter den Anlegern
• Aus fundamentaler Sicht führt nach wie vor kein Weg an Aktien vorbei – auf unabsehbare Zeit tief bleibende Zinsen sowie der anhaltende Aufwärtstrend bei Industrie und Konsum geben Aktien Rückenwind
• Technisches Bild ist gemischt – während mittelfristige Indikatoren weiterhin für Aktien sprechen, mahnen dynamischere Tagesmodelle zur Vorsicht
• Reduzierte Aktienquote trägt dem höheren Marktrisiko Rechnung
• Stilmodelle mit defensiver Ausrichtung – Präferenz für Qualitätswerte mit stabilem Ertragsgang und hoher relativer Stärke
• Übergewicht in Aktien aus dem Industriegüterbereich wird beibehalten – Werte zeichnen sich aber durch eine unterdurchschnittliche Zyklizität aus
• Der Systematic Equity Fund CH schlägt den SPI im Oktober dank einer guten Titelselektion und Aktienquotensteuerung um 1.17% – Outperformance in 3 der letzten 4 Monate