ICG Commodity Update – June 2020

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

Energy

The oil market has avoided Armageddon and oil demand is clearly recovering from the historic pandemic lows. The IEA and EIA both made significant upgrades to their 2Q20 demand estimates, with the IEA noting recoveries in China and India and upgrades to a number of OECD markets on improving mobility statistics. In the US, gasoline demand has increased the most, with individuals using their private cars to commute to work instead of using public transport. Therefore, the gap between demand and supply is narrowing, but inventories are still rising. However, from January to May, visible oil inventories increased less than expected. Voluntary production cuts by OPEC and its allies and involuntary cuts in North America triggered a steep drop in oil production in recent months. The US oil rig count has fallen to 188, the lowest since 2005. Most analysts expect oil markets to be in deficit from 2H20 on and throughout 2021. Some analysts even expect oil markets to fall into a large and sustained deficit past 2022. Most analyst agree that this crisis will have significant impact on global oil supply, potentially setting up a supply crunch even if demand was not even to reach 2019 level of 100Mb/d. Low oil prices have resulted in underinvestment in the exploration and development of new oil supply since the oil price downturn began in 2014. Reality shows that companies are moving away from investing in liquid hydrocarbon development and this has accelerated, exacerbated by extreme oil price volatility, climate change and ESG pressures. JP Morgan analysis reveals that cumulative underspend in oil projects, on track to reach $1tn by 2030, means the industry is at a point of no return with supply to peak at 102mboe/d in 2022. Companies’ capex is already constrained by greater shareholder pressure on free cash flows and total shareholder return focus. Oil & Gas companies are re-engineering their portfolios towards barrels that sit at the low end of the cost curve. But projects with a breakeven price that matches the current market price is simply insufficient. Even with project breakeven that have fallen quickly over the past 5 years, well over 50% of potential FIDs over the next 5 years are out of the money at crude prices of $50/bl. Additionally, for an ever increasing proportion of investors, holding the lowest-cost barrels is simply not enough, and the companies are facing calls to outline steps to show progress in reducing emissions and CO2 intensity. Further to that, applying a “low carbon” “low breakeven” overlay to global proven (1P) reserves, implies a near halving of the reserve life down to just 25 years, below that seen in 1980. To quote JP Morgan “The world is set to be short oil much sooner than it no longer needs oil”. We are persuaded that if oil prices do not rise sufficiently to stimulate additional supply, this risk will only be greater. However, the surviving Oil & Gas companies will certainly disproportionate profit from all this.

 

Industrial Metals

Base metals have recovered firmly since late March, with broad sector indexes up comfortably quarter to date. Especially copper, a proxy for global economic growth, up over 28% since its lows mid-march. Better-than-expected macroeconomic data across the globe and ongoing production challenges have tightened market balances, particularly in China. The lack of any significant rise in visible inventories during the first half of the year and drawdowns in some metals lately underscore the unusually tight market backdrop considering the contraction in global industrial production in 2Q. The quick policy support, both fiscal and monetary, that has been deployed as well as the pandemic’s impact on supply are speeding up the recovery of base metals prices way faster than analysts expected. Considering the more supportive backdrop for industrial metal prices so far, with industrial metal demand outside China likely to stage a comeback as well, the conditions are still bullish for the second half of the year. Looking closer at copper, the metal enjoyed its best quarter in nearly a decade, backed by a demand recovery in top consumer China just as the covid-19 pandemic threatens output in key producer Chile. The spread of the virus in Chile has an outsized impact on the copper market because the nation’s mine churn out a large chunk of global supply – over 28% in 2019 to be exact. Global copper holdings tracked by major exchanges in London, New York and Shanghai have shrunk more than 25% this quarter as China’s recovery spurred buyers to seek supplies. The overall volume is now lower than a year ago. A weakening dollar may also help push commodities prices higher and support the sector.

 

Looking at equities, the Stoxx 600 Basic Resources index may still be down 16% this year, but since its down in March, it’s been the best performing industry group in Europe, surging over 49%. Despite the past quarter re-rating, the overall basic resources sector is far from looking expensive relative to the broader market, with all metrics showing some discount, particularly on the price-to-book and the enterprise-value-to-ebitda ratios. According to Morgan Stanley, things are looking good for the mining sector. Analysts see opportunities especially in copper-related equities which are set to benefit from the free-cash-flow yields. Looking at the financial metrics mentioned above, the industrial metals champions fund has a price-to-book ratio of 1.9x, an enterprise-value-to-ebitda (2020E) of 5.4x and a free cash flow yield (2021E) of 9.3%.

 

Precious Metals

Gold has struggled to find a direction since rebounding in late March on the back of the Fed’s quantitative easing announcement as it remains torn between a large negative wealth shock to consumers and a surge in “fear” driven investment demand. Especially to emerging markets, the Covid shock has been substantial. India’s gold imports plunged by 99% in April/May, while Russia’s central bank stopped buying gold since the oil price collapse, for example. Offsetting this weakness has been an unprecedented surge in “safe haven”-demand. Year-to-date gold coin demand is up 30%, total weight of gold in ETF’s is up 20% year-on-year and there is a large amount latent gold demand. According to Goldman Sachs, ETFs capture around half of physical investment volume inflows implying that investment demand could be up as much as 1000 tonnes which more than offsets the 700 tonne fall in emerging market consumer demand. Gold investment demand tends to grow into the early stage of economic recovery, driven by continued debasement concerns and lower real rates. Also, analysts expect a material comeback from emerging market consumer demand boosted by easing of lockdowns and a weaker dollar.

 

Looking at equities, gold producers are expected to bounce back quickly from Covid-19 related setbacks and will see greater margins due to lower operating costs and higher gold prices. According to analysts, 2Q production will be lower but levels will normalize during the second half of the year. Gold miners will benefit from the sharp fall in prices of energy and materials as well as foreign currency depreciation and lower-for-longer interest rates which will lead to higher margins for the companies. The low fuel and energy prices could reduce operating costs by up to 5% according to Moody’s Investors Service. Despite being a cliché in the investment world, analysts are not anticipating that an elevated gold price will drive a return to the bad behaviours of the past. Growth for growth’s sake has been shunned by investors and management teams alike and therefore, costs are expected to remain relatively stable as the current environment aid in maintaining cost bases.

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ICG Systematic Equity Fund CH Update – Juni 2020

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

 

  • Positives Momentum an den  Aktienbörsen schwächt sich im Juni ab – Blick der Anleger richtet sich vermehrt auf Konjunkturdaten, die noch nicht die erhoffte V-Erholung reflektieren
  • Extrem schnelle Sektor- und Stilrotationen – nachdem zu Beginn des Berichtsmonats die Jagd nach billig bewerteten Zyklikern ihre Fortsetzung nahm, schlägt das Pendel gegen Ende Juni wieder in Richtung Large Caps mit nachhaltigen Gewinnaussichten aus
  • Klares Buy-Signal für Aktien aus fundamentaler Sicht bleibt intakt – Tiefzinsumfeld führt zu Alternativlosigkeit von Aktien (“TINA”)
  • Technisches, marktpsychologisches Umfeld präsentiert sich gemischter – Tagesmodelle, welche während des Rebounds fast durchgehend positive Signale für Aktien generierten, zeigen zunehmende Schwäche
  • Aktienquote von 60%, nach Futures-Absicherungen
  • Stilmodelle ohne klare Signale: “Momentum” als einziger Stil, der immer noch klaren Rückenwind hat – Sektorenmodelle werden noch einmal zyklischer
  • Performance von 0.98% im Juni  auf Augenhöhe mit SPI – gute Titelselektion kann Verluste durch Absicherungen und Übergewichtung von Mid- und Small Caps ausgleichen
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ICG Commodity Update – May 2020

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

Energy

Oil markets rebalancing continues to gather speed, driven by both supply and demand improvements which are running ahead of expectations. The oil market has avoided the nightmare scenario of filling storage and the Brent oil curve is no longer in super-contango. The 5-year Brent price to which equities had traded more closely before the price collapse rose to >$50/bl. Meanwhile, the gradual relaxation of restrictions on movement means we are seeing the early signs of gradual rebalancing of global oil markets. Mobility still remains limited for many citizens, but businesses are starting to reopen gradually and people are returning to work, which will provide a boost to oil demand. The number of people living under some form of confinement at the end of May will drop to ~2.8bn worldwide vs. 4 bn a month earlier. High frequency data show already an improving global oil demand picture. Tanker tracker data suggests record Chinese crude imports in May thanks, potentially, to the Chinese economy’s fast recovery. On the supply side, we are seeing massive cuts in output from countries outside the OPEC agreement and faster than expected. Oil rigs in the US have plunged to levels below the last crisis. According to WoodMac price-induced production shut-ins stand at 4.4mboe/d already. Significant investment reductions also results in the lowest project start-ups of the latest 20 years with only 1.6mboe/d new capacity additions this year vs. 5 years average of 4.4mboe/d. Further to that, OPEC is scheduled to meet next week and there is an emerging prospect of extending the current May/June 9.7mboe/d cut for a further two months. Therefore most analysts expect oil markets to move from oversupplied to undersupplied in 3Q 2020 and this for a while to reduce inventory levels. The flexibility of the Oil & Gas industry business model is heavily underestimated. Specifically, when capex is reduced the global supply chain becomes cheaper (service costs, equipment, etc.). The listed Oil & Gas upstream sector announced $180bn cost reductions so far ($128bn capex, $18bn opex, $32bn buybacks/dividends). The IEA expects investment contractions of $400bn over the whole energy industry, the largest decline ever. As production growth is slowed, decline rates moderate. Companies further reduce opex and at the end cost structures are once again slashed. As a result, companies are citing breakeven levels below expectations. According to our ICG data, the listed Oil & Gas universe will end 2020 with record low full cycle costs of $35/boe in 2020E vs. $45/boe in 2019. The reduced costs base will result in companies having a much stronger capital efficiency going forward. Several companies maintained their dividends highlighting their confidence in their ability to traverse the downturn. The sector is in much better shape than in previous crisis and the new future is overlooked. Valuations continue to be depressed and are in a historical context at all times lows.

 

Industrial Metals

World trade is expected to fall by between 13% and 32% in 2020 as the COVID 19 pandemic disrupts normal economic activity and life around the world according to the WTO. As change in economic growth and the change of industrial metals prices tend to go hand-in-hand, overall global primary demand in metals could fall by 5-6% in 2020 according to Goldman Sachs. As in the GFC of 2008-09, governments have again intervened with monetary and fiscal policy to counter the downturn – the G20 nations have committed more than $7 trillion of fiscal stimulus which will certainly contribute to a long sustaining period of metal demand growth after the lockdown. Therefore, economic activity is set to bounce in 2H 2020 and demand for industrial metals should recover as lockdown measures are eased. Also, global mine supply disruption has been an important offset to demand weakness during the COVID-19 outbreak as some of the world’s biggest mines were forced to halt production. Individual mines remain vulnerable to virus-related disruptions even though as nationwide restrictions in key mining countries are lifted. Looking at base metals inventories, the rate of inventory builds gives an indication of the balance between demand contraction vs supply disruption. Most analysts expect near-term that supply will recover faster than demand resulting in a build. However, so far, metal inventories have been on the rise across the sector but in line with seasonal norms. Overall, inventory levels at exchanges remain 10-50% below the 3-year average when adjusted for seasonal swings. Interestingly, in China inventories are declining, reflecting a strong recovery in activity/demand as restrictions ease. After the lockdown, activity in manufacturing is slowly building up – already 90% of Chinese manufacturing and construction activities has resumed by end-March.

 

On the company side, several input factors/prices for miners have collapsed e.g. oil, gas, LNG, coal and also FX has given away. As a result, the cost base for metal producers is substantially lower than it was at year end 2019. The flexibility of the mining industry’s’ business model is heavily underestimated. Specifically, when capex is reduced, the global supply chain becomes cheaper. With companies further reducing opex, cost structures are once again slashed which will result in breakeven levels below expectation and a much stronger capital efficiency. Analysts expect miners to generate a positive net income in 2020 even under the current low base metals prices with capex programs to stay low in coming years. They still generate free cash flows and most companies maintained their record high dividends, highlighting their confidence to traverse the downturn.

 

Precious Metals

The gold price was slightly up 2.6% during May. Gold continues to be a safe haven “currency” during the virus outbreak outperforming major currencies so far. The aggressive monetary stimulus of key central banks is supporting demand for real assets like gold as real interest rates are currently expected to remain close to zero through 2024. Investors continue to be hungry for gold as ETF inflows reached a record high and total known ETF gold holdings are close to 100 million ounces. Deflationary concerns may be an obstacle near-term but dovish central banks and eventually normalizing inflation expectations should ensure gold-friendly backdrop, anchoring real rates at very low levels. Meanwhile, some economists fret that the pandemic could lead to inflation. Virus-fighting measures choke off production and supply chains. At present the amount of goods and services available for purchase is tumbling. If supply interruptions translate into shortages in shops, then higher prices could follow. Massive stimulus programs are another potential source of inflation. However, inflationary effects are most likely to appear once the virus is truly beaten. Rehired workers could spend a high share of their incomes. The economic traumas of the early 21st century may push governments and central banks to prefer high economic growth and low unemployment to low and stable inflations, as happened after the Second World War. In future companies are willing to pay more to get local supply and some might even build up stockpiles of supplies. Gold shares fundamentals have changed significantly over the last few years. Many of them are generating record high free cash flows currently and the sector is expected to be debt free next year. Several input factors for miners have collapsed (e.g. oil, gas, FX). As a result, the cost base for metal producers is substantially lower than it was in 2019 and companies are citing breakeven levels below expectations. The reduced cost base will result in much stronger capital efficiency. The cash margin of the gold producers is currently at record high and the industry is currently more profitable than at any point in recent history. It seems likely that the market may start to look to these companies as good business, rather than just leveraged ways to invest in gold. M&A activity in the gold industry has increased significantly lately with several deals during May. Analysts say there is an abundance of gold companies that lack the scale to appear on the radar of big generalist investors and therefore the gold consolidation wave is set to continue.

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ICG Commodity Update – April 2020

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

Energy

The drop in oil demand in April was likely the largest in history. However, the beginnings of a gradual reopen of European and US economies suggests that we are past the worst of the demand downturn. There has been a full recovery in road congestion for the work week days across major Chinese cities. Weekly preliminary oil demand estimates from the US confirm an improving demand trend. This trend in improving data is likely to continue going forward as more countries loosen their restrictions. At the same time, global oil supply is expected to contract significantly. First, as operating costs are not being covered for many oil fields, there are forced production shut-ins. At a Brent price of $25/bl, 10mbpd of oil production does not cover operating costs. Low prices have already triggered global production shut-ins worth 3.9mboe/d acc. to WoodMac. Also, OPEC+ have started to cut production. Nevertheless, the supply side has a time gap. Therefore inventories are increasing but going forward this increase may slow. Nevertheless, questions are being raised on how many more days of supply storage there are in the tanks if oversupply continues. Orbital estimates tanks can still accommodate >2 billion barrels worldwide. The global storage is 56% filled. Unlike energy equities, which price for anticipated fundamental changes, energy commodity prices reflect the state of the current market. Some regions are experiencing more oversupply than others. This was obvious in Cushing, Oklahoma, which is the NYMEX clearinghouse for the WTI oil contract. In a perfect storm, the May WTI futures contract fell to minus $37.6/bl on 20.04. Oil prices went negative for the first time on record and garnered substantial media attention. A lot of the storage got contracted during April. This doesn’t necessarily mean that the tanks got full at that time, but they were basically secured. The contango got steeper and steeper because you have to take delivery on the NYMEX exchange and there was no storage available to take the delivery. Some days before expiry of the May contract a lot of people were still long. Indeed, bullish investments in oil ETFs reached a historic high. It’s important to know, that Brent does not deliver into a landlocked, physical delivery point like WTI.

 

Nevertheless, oil prices at a multi-year low are pushing the rebalancing of the oil market into the most painful phase for producers. A wave of capex guidance updates indicates cuts of >30% for 2020. Capex cuts will reduce enhanced oil production recovery activity and will lead to a rise in decline rates in these fields. Underinvestment in the exploration and development of new oil supply could eventually lead to insufficient supply growth over the coming years. During 1Q reporting season companies are providing sobering forward outlooks. In an example of the strain facing energy companies, Shell cut its dividend for the first time since 1945. Despite this, energy equities outpaced the broad market over April.

 

Industrial Metals

Commodities ended the month with a mixed performance, even as April 2020 made history as the month that prices for WTI crude futures traded below zero for the first time ever. According to analysts, the bounce in copper prices reflect the earlier re-opening of the economy in China. This is not yet an all-clear, but China as well as Korea and Taiwan appear to be past the worst economic impacts from the COVID-19 pandemic. Looking closer at China, there are some strong recent data points in the metals sector. Analysts agree that China is on a recovery path even with the external shock from the global lockdown, but there is growing evidence that, on the back of old school fiscal measure, the metals intensity of this recovery is strong. While most are cautious that China alone can offset the drop in global demand we are seeing, in each of 2009, 2013, and 2016 Chinas pull on metals markets during a recovery cycle was much stronger than anticipated. Also, while in some cases inventory is still elevated, in steel and cement the market has seen aggressive draws over April, implying construction has recovered strongly as migrant workers returned. Indeed, latest data from Chinese consultancies shows rebar consumption over the last two April weeks the highest ever seen. Meanwhile, aluminum inventory is now back below levels seen in April last year and SHFE copper inventory back to levels into Chinese New Year. Prices remain well below the low end of the 2019 trading range though. Looking ahead, it’s reasonable to expect commodity prices to recoup some of their losses due to coronavirus-related demand destruction once the crisis is behind us. Both the global central bank accommodative policies and government fiscal stimulus may also work to spur economic growth and inflation, both of which can push commodity prices higher.

 

Looking at Equities, Glencore cut its 2020 capex guidance by about $1-$1.5 billion compared to original forecast and joins in mining industry’s rush to cut spending. The cuts are as a result of some projects deferrals, lower production and falling input costs. Glencore also lowers output goals for metals including zinc and nickel after operations were disrupted. Several mines around the world have been forced to slow or temporarily close as countries wrestle to contain the spread of the virus. Other producers including BHP Group and Rio Tinto have also announced plans to review or lower capital spending, putting the brakes on development projects as they seek to maximize cash and protect balance sheets. There is growing concern that the spread could lead to disruption at key assets that drive profits.

 

Precious Metals

Gold prices hit fresh record highs twice in April. The expansion of the monetary base by the Fed combined with low interest rates and amplified inflation creates a very constructive environment for gold. The Federal Reserve is in the process of creating an unprecedented amount of new money to deal with the fallout from the epidemic. The Fed has announced several multi-trillion dollar monetary programs designed to provide massive liquidity to markets to prevent the economy from collapsing. The easing of the lockdowns in some parts of the world as well as hopes for treatments dented the rise a bit by the end of the month. Some of the world’s largest hedge funds are raising their bets on gold, forecasting that central banks’ responses to the coronavirus crisis will lead to devaluations of major currencies. They are wagering that moves to loosen monetary policy and even directly finance government spending, intended to limit the economic damage from the virus, will debase fiat currencies and provide a further boost to gold, according to the financial times. New York-based Elliott, which manages about $40bn in assets, even told its investors that gold was one of the most undervalued assets available and that its fair value was multiples of its current price. Looking at platinum, there is currently 73% of world supply disrupted due to the lockdown in South Africa – which is the world’s largest platinum supplier by country. Same goes for Palladium with 38% of supply out of markets.

 

Looking at gold equities, analysts expect gold miners to profit from the rebalance of the MSCI Standard Index in May as some gold equities will go into several indices which will spur buying. There was also M&A activity in the precious metals space with Silvercorp Metals acquiring Guyana Goldfields. Silvercorp said the acquisition will create a diversified precious metals producer with two profitable underground silver mining operations in China and a gold mining operation in Guyana. Also, a company jointly owned by Barrick Gold and China’s Zijin Mining Group got a reject on its application to extend the lease on the Porgera Gold mine in Papua New Guinea. The special mining lease expired last year and discussions are underway since 2017. The country wants to start negotiations about a transitional period, after which time the state will enter into owning and operating the mine. Barrick and its Chinese partner will pursue all legal avenues to challenge the Government’s decision. Operations are currently suspended.

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Dienstleistungen für wohltätige Stiftungen

Independent Capital Group AG, eine FINMA regulierte Finanzboutique und Multi Family Office, welche sich auf die Betreuung von wohltätigen Stiftungen spezialisiert hat, baut ihr Angebot für wohltätige Stiftungen aus. Das Team betreut Stiftungen, wie zum Beispiel die MBA for Women Foundation und die Stiftung Hopp-la, in verschiedensten Bereichen. Sei es bei der Errichtung der Stiftung und deren Organisation, bei der Geschäftsführung und Verwaltung des Vermögens sowie bei der Berichterstattung des Jahresberichtes und der Rechenschaftsablage zu Handen der Stiftungsaufsicht. Das intern bestehende Fachwissen und die langjährige Erfahrung ermöglicht es eine effiziente und kostengünstige Plattform für Stiftung anzubieten.

 

Zu den Dienstleistungen gehören:

 

Errichtung von gemeinnützigen Stiftungen

  • Erstellen der nötigen Dokumente, Vorprüfung bei der Stiftungsaufsicht
  • Unterstellung bei der Stiftungsaufsicht und Erlangung der Steuerbefreiung

Unterstützung der Geschäftsführung

  • Bearbeitung von Anfragen an die Stiftung
  • Koordination von Spenden und Vergabungen

Stiftungsorganisation

  • Stiftungssitz und Sekretariat für den Stiftungsrat
  • Finanzen und Personal
    • Zahlungsverkehr
    • Führen der Buchhaltung
    • Controlling und Reporting
    • Cashflow-Planung
    • Personaladministration
  • Erstellung eines Jahresberichtes und des jährlichen Reportings an die Stiftungsaufsicht

Verwaltung des Stiftungsvermögens

  • Beratung und Unterstützung bei der Vermögensverwaltung
  • Überwachung/Kontrolle der externen Vermögensverwalter
  • Berichterstattung an den Stiftungsrat

 

«Sämtliche Dienstleistungen können auf die Bedürfnisse der Kunden angepasst werden. Der Anspruch liegt darin eine neue Stiftung bzw. eine bestehende Organisation zu entlasten und sie möglichst effizient, professionell sowie kostengünstig aufzustellen, damit die Ressourcen der Stiftung zielgerichtet für ihren vorbestimmten Zweck verwendet werden können.» erklärt Reto Michel, Leiter Family Office Services.

 

 

Die Independent Capital Group ist eine unabhängige Schweizer Finanzboutique mit Niederlassungen in Zürich und Basel. Sie untersteht der Aufsicht der Eidgenössischen Finanzmarktaufsicht FINMA. Gegründet 2005, bietet die Firma mit ihren rund 15 Mitarbeitenden diverse Dienstleistungen in den Bereichen Vermögensverwaltung und Administration an.

 

Kontakt

Reto Michel, CFA                                                                               Mirko Kräuchi

rm@independent-capital.com                                                        mk@independent-capital.com

+41 (0)44 256 16 14                                                                           +41 (0)44 256 16 13

 

Independent Capital Group AG

Waldmannstrasse 8

8001 Zurich / Switzerland

 

 

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ICG Commodity Update – March 2020

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

Energy

This may be the most brutal environment for energy markets in decades. The combination of significant demand destruction and a meaningful increase in oil production is very unusual in the oil world. The former has been caused by the coronavirus pandemic, and later by the upcoming production increase following the collapse of the production deal between OPEC and its allies. Oil prices have tanked as a result and Brent crude oil reached $20/bl (-65% YTD) at the end of the month.

The demand impact is unprecedented in global post-war modern history. In general, this is probably the largest economic shock of our lifetimes, but carbon-based industries like oil sit in the cross-hairs as they have historically served as the cornerstone of social interactions and globalization, the prevention of which are the main defence against the virus. Accordingly, oil has been disproportionately hit, likely more than 2x economic activity according to Goldman Sachs.

Meanwhile, with the collapse of the production cut deal, most OPEC+ nations that have the potential to increase production have signalled they will from April onwards. This will flood an already oversupplied market, pushing the incremental supply into inventories. This resulted in oil prices plunging into the cash cost curve to force production shut-ins at existing oil fields. Data from Wood Mackenzie indicates that with Brent at $25/bl, around 10mboe/d of global oil production does not cover operation costs; this rises to around 22mboe/d if Brent trades at $15/bl.

Nevertheless, there is still hope that low oil prices might force Saudi Arabia, Russia and other producers to the negotiating table including the US. Indeed on Thursday Trump tweeted that 10 to 15 million barrels cuts were possible by Russia and Saudi Arabia pushing the oil prices up 25%. Interestingly, the prospect of the US joining in on any output cut was raised by the Texas Railroad Commission. President Trump is set to meet this Friday with the heads of some of the largest US oil companies to discuss measures to help the industry as it fights for survival. While at the end coming to an agreement remains difficult, signs of policy discussions are surely positive and may result in an urgent meeting of OPEC+ and probably other producers.

Nevertheless, the price collapse is reshaping the oil and gas sector, with the focus having shifted to survival mode. We have reviewed the financial gearing ratios of the industry. If the markets averages $40/bl oil in 2020 operating cash flows would fall by 20% this year according to UBS. Integrated Majors gearing would end about 300bps higher at YE2020 at about an average of 29% net debt/cap. However, smaller players have significant higher leverage ratios. At the end Oil Majors will probably consolidate the best assets in the industry and will shed the worst assets. There will be local consolidation amongst E&Ps, and when the industry emerges from this downturn, there will be fewer companies of higher asset quality. With robust balance sheets, a manageable dividend burden, and leading FCF outlooks we see Oil Majors as best positioned to weather the storm, with less ‘need’ to right size the dividend. Most of our portfolio is invested into those companies and such companies are masters in crisis like this. However, the bruised and battered US shale industry is also poised to emerge from the oil crash as a winner, according to Goldman Sachs. Shale’s high-pressured wells and short drilling time mean the industry is well positioned to benefit if the current plunge in oil causes long-term damage to production capacity, resulting in a price jump when demand returns. Paradoxically, all this will ultimately create an inflationary oil supply shock of historic proportions because so much oil production will be forced to be shut-in. The global economy is a complex physical system with physical frictions, and energy sits near the top of that complexity. It is impossible to shut down that much demand without large and persistent ramifications to supply. The one thing that separates energy from other commodities is that it must be contained within its production infrastructure, which for oil includes pipelines, ships, terminals, storage facilities, refineries, and distribution networks. Therefore as Goldman Sachs is saying, this will likely be a game-changer for the industry. Once you damage the capital stock in oil it is an expensive and time-consuming process to rebuild, assuming it can be rebuilt at all. Therefore in spite of everything, we think that this may become a big opportunity going forward.

Industrial Metals

Broadly diversified commodity indices are down heavily this year with energy, particularly crude oil and oil products, the most, followed distantly by base metals. The negative impact of COVID-19 on economic growth via government policy measures is severely weighing on commodity demand – economic activity is suffering greatly. Analysts expect GDP growth in major economies to contract sharply in 2Q, by up to mid-single digits. A beacon of hope for commodities is China. China’s GDP growth is primed to expand modestly in 2Q, after slumping sharply in 1Q. The slide in demand from developed economies is a headwind. But with China accounting for around 50% of global base metal demand, Chinas expected growth trajectory should provide critical support to the commodity sector. By the end of March, PMIs in China are already back from their lows in February and also back to growth with values over 50. After the lockdown, activity in manufacturing is slowing building up. Already 90% of Chinese manufacturing and construction activities had resumed by end-March. When it comes to base metal inventories, visible inventories have been on the rise across the sector. The good news is that the increase has been in line with seasonal norms during 1Q, with industrial production and fixed-asset investment sliding by double digits in the first two months of the year, the inventory uptrend has been surprisingly benign, except for nickel. According to analysts, overall inventory levels at exchanges remain 10-50% below the 3-year average when adjusted for seasonal swings. Looking at iron ore, Marine Traffic shows that Australia’s Big 4 surprisingly shipped 76Mt in March 2020, which is on an annualized basis a 27% month-over-month and a 36% year-over-year rise. The Pilbara iron ore operations and shipments are largely tracking to the guidance that was provided prior to the COVID-19 outbreak. Some analysts see iron ore as their most preferred commodity exposure, however, other markets could tighten up more quickly than expected, with such a large share of supply out because of the strict corona measures. A number of major commodity producing countries including Peru and South Africa have announced restrictions that will result in temporary closures of mines and smelters to prevent the spread of the virus, more curtailments may yet be imposed. The majority of announced closures are for 2-3 weeks, but it is possible that restrictions are extended and that some marginal operations may stay closed until commodity prices improve. The duration and therefore the total amount of lost supply in 2020 is unclear at this stage. The most impacted base metals are zinc and copper. Supply disruptions for iron ore and nickel are limited at this stage. It is worth noting the iron ore market in particular is highly concentrated leaving it vulnerable if supply is disrupted in Australia or Brazil.

 

Precious Metals

Even though gold is in high demand, the metal closed the month with a modest performance of only +1%. New rounds of rate cuts and quantitative easing measures by central banks around the world speak for higher precious metal prices in the months ahead. But with investors scrambling for liquidity to cover losses in leveraged equity and bond positions, the gold price was under pressure until recently. Thanks to the Fed’s aggressive monetary stimulus, gold has already rebounded faster than back during the global financial crisis. Back in late 2008, gold weakened as well on liquidity needs over two months, followed by a firm recovery thereafter. With central banks rolling out all their tools to cushion the economic fallout, real interest rate expectations should move back into negative territory as inflation expectations, which have dived sharply of late, begin to normalize which is bullish development for gold. Holdings in gold-backed exchange-traded funds jumped to a new record as investors seek haven assets during the global coronavirus pandemic. Concerns about the physical supply of bullion roiled markets by the end of the month as logistical disruptions led to speculation there wouldn’t be enough metal in New York to deliver against contracts traded on Comex. Those fears have abated as investors rolled forward their positions, with inventory now more than able to cover the volume of gold eligible for delivery. Still, investors are piling into ETFs as supply of physical gold in the form of coins and bars become tighter going forward. Investors already have to pay up to lay their hands on small gold bars and coins – well above the per ounce prices being quoted on financial markets. As demand exploded, there has been pressure on supply, as global travel shuts down and some refineries and mints have stopped operating or capped production because of local lockdowns – South Africa for instance closed all its mines for at least 21 days from mid-March. On the company side, it is no surprise that a wave of government-enforced lockdowns, and heavy social distancing measures shutting down operations. So far there have been very few cases of infection on mine sites but measures have gone far beyond than just limiting non-essential people on site and travel. Some corporates have reduced people and production rates, or taken pre-emptive measures to suspend operations to protect local communities. The latest round of mine outages is a result of harder government and corporate prevention measures. Impacts range from complete cessation of activities like Argentina, South Africa and New Zealand to virtually no impact in the Pilbara iron ore operations other than precautionary measures.

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ICG Systematic Equity Fund CH Update – März 2020

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

 

  • Ausverkauf an den weltweiten Aktienmärkten geht auch im März weiter – in historisch einmaliger Geschwindigkeit wird aus einem Bullenmarkt ein Bärenmarkt. Rekordhohe Konjunkturprogramme bremsen Abstutz gegen Monatsende
  • Extremer Gleichlauf unter den Investoren zeigt sich auch auf Sektoren- und Stilebene: Zyklische Small- und Mid-Caps leiden unter dem schwindenden Risikoappetit am meisten, grosskapitalisierte Qualitätsaktien mit hoher Outperformance
  • Oversold-Konstellationen an den Aktienbörsen bleiben angesichts eines anhaltend grossen Negativismus unter den Marktteilnehmern bestehen – unterstützt von einem förderlichen geld- und fiskalpolitischen Umfeld bleibt die Aktienquote bei 100%
  • Auf Stilebene zeigen ICG’s Modelle  eine Präferenz für günstig bewertete Aktien mit tiefer Volatilität und starkem Preistrend von Firmen mit stetiger Cash-Flow-Entwicklung
  • Zukauf von defensiven Sektoren “Gesundheit” und “Nahrungsmittel” während des Rebounds Ende März – Industriegüteraktien bleiben wegen ihres Bewertungsdiskonts übergewichtet
  • Hoher Anteil von Small- und Mid-Caps (gegen 50%) sowie Gleichgewichtung der Einzelpositionen führt im März zu Underperformance gegenüber dem SPI – SMIM und SPIEX büssen im Berichtsmonat mit -12.43% resp. -11.53% rund 8% auf den SMI ein
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Letter to our Investors

 

Friday 13. March 2020

 

Dear Investor

We are writing to give you an update on our investment solutions and on commodities more generally. Many of us may asked themselves how to behave in stressful times like these and how they should set up their portfolio for crisis mode – we sure did the same.

 

On a week like this, where panic selling overrides rational considerations like fundamentals or profitability, the best strategy is often to remain calm and ride out the swings until markets stabilize. If history is any indication, severe dislocations actually offer rare opportunities. Even “Champion” companies with a long outstanding track record are sharply down and such companies are masters in crisis like this.

 

We have reviewed the financial gearing ratios of our universe. In general terms, natural resource companies appear to have learnt from the 2008/09 Great Financial Crisis (GFC). During that time emergency asset sales, restructures and equity raisings had to be undertaken, which exacerbated the downside for many share prices. This time financial leverage is a lot more modest. Nevertheless, we have run a bearish commodity price scenario based on the 2008/09 and 2015/16 cycles.

 

For energy markets there is little historic precedent to oil markets experiencing both a demand and supply shock simultaneously. However, the impact of the GFC in 2008/09 and impact from breakdown of OPEC agreement during 2014-16 may be suitable extremes to consider. These would suggest a scenario of oil prices visiting $30/bl or lower and averaging 2020 in the mid-$40s. Most oil companies calculated 2020 budgets on $50-55/bl oil at the beginning of the year. However, if the markets averages $40/bl oil in 2020 operating cash flows would fall by 18-20% this year according to UBS. Integrated Majors gearing would end about 300bps higher at YE2020 at about an average of 29% net debt/cap. However, smaller players have significant higher leverage ratios. The oil universe has an avg. net debt/cap of +70%. Therefore some players will disappear, but some will consolidate and become much stronger.

 

The Energy Champions Fund has currently a net debt/equity of 33%, P/B of 0.7x, P/CF of 2.4x, FCF yield 2020E of 12.7% and a dividend yield of 7.6%

 

For miners balance sheets are stronger vs 2015 and they are generally better positioned for a period of low prices. Total net debt of the industrial miners declined by 50% between YE2015 and YE19. The UBS spot commodity price scenario still implies a FCF yield of 10%, dividend yield of +10% and an EV/EBITDA 4x. A worst case scenario (commodity prices fall again 25%) would still result in a 5% FCF yield, dividend yield of 3% and an EV/EBITDA of 8x. This is because prices of copper, aluminium, iron ore and other resources have sold off recently, but have fared better than oil and equities, incl. the share prices of the miners who dig them up. Some analysts say the more muted response from metals should ultimately be seen as positive for other markets, given their price moves are often closely aligned with economic fundamentals.

 

The Industrial Metals Champions Fund has currently a net debt/equity of 23%, P/B of 1.4x, P/CF of 3.6x, FCF yield 2020E of 12.2% and a dividend yield of 8.1%

 

The Precious Metals Champions Fund has currently a net debt/equity of 11%, P/B of 1.8x, P/CF of 6.3x, FCF yield 2020E of 8.5% and a dividend yield of 2.1%

 

What is important to remember, is that the natural resource industry has dealt with sharp price declines several times in recent decades. Big oil and big mining companies have invested through those cycles. And we are convinced that most of them can and will defend its dividend through this period of cyclical weakness.

 

Macro data and commodity demand is likely to get worse before it gets better and it is too early to tell if we will see a ‘V’, ‘U’, ‘W’ or ‘L’ shaped recovery, but we believe monetary and fiscal stimulus will drive a recovery in commodity demand/ prices in the next 6 to 12 months and see significant value in natural resource companies.

 

For those of you that have been following us over the years, you may remember that our main commodity fund the Gateway Natural Resources Fund lost 60% on the 2008/09 GFC, but did +90% in 2009, and +150% by 2011.

 

Finally, this crash is frustrating for us because we had high hopes for commodities this year. Commodities were emerging from the slowdown of the previous few years and beginning to adjust to real fundamentals.

 

Last but not least, remember that commodities may be unloved, but they are needed.

 

We are open to further discussions and may send you further information on request.

We wish you all the best and good health!

                                                                                           

Dietrich Joos                                                                            Pablo Gonzalez                                                                     Cyrill Joos

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ICG Commodity Update – February 2020

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

Energy

The spreading coronavirus and the knock-on impact to the global economy took a toll on the equity market last week with the SPX dropping 11.5% (the most in one week since 2008). Global oil demand will certainly take a hit during 1Q20, primarily via reduced demand in the transportation sector, but it will take months to assess the real demand impact due to delayed data releases. Weekly oil inventory data released in the US, Northern Europe, the UAE, Singapore, and Japan is the best indicator to assess the oil market. Some market participants have suggested oil demand has fallen by 4mboe/d y/y. All else equal, that would suggest that oil inventories should increase weekly by 28mboe on top of seasonal patterns. However, looking at the aggregated weekly data, oil inventories have fallen this month. Global visible data suggest inventories are moving sideways this year, not strongly up. It may take longer to see those oil inventory builds showing up. Indeed, Orbital data shows that Chinese inventories have built 6.3mboe in the past 7 days, compared to the nearly 12mboe over the previous 30 days. Year-on-year growth in Chinese stockpiles was just at 3.4mboe. The numbers show that Chinese builds are below what media reporting on demand destruction would suggest. On the other hand, falling production is at least partially offsetting those demand losses. Libya has lost 1mboe/d this year. Surprisingly, Norwegian oil production declined in January. The latest US sanctions on Venezuela might drag down production again and US crude production might not move sideways as suggested by weekly data, but fall modestly, too. However, this week there is an OPEC meeting in Vienna. The key will be to see if OPEC+ cuts production. Some press reports speculating the prospect of +1mboe/d cut and some say Russia is now ready to cooperate. Nevertheless, for energy investors it was a bloodbath with the S&P Oil&Gas Index (XOP) -18%, WTI crude oil -15% and natural gas -11% in just one week! At least, managed money positioning showed a jump in Brent net longs last week through Tuesday and WTI crude oil speculators had closed out more than 3x as many short positions. However, in energy equities, short sellers have added more than $460m to their short-interest positions since the start of February. Nonetheless, the 4Q19 earnings season is largely in the books. Notwithstanding unravelling oil prices, E&P budgets were largely predicated on $50/WTI in 2020 and FCF yiels are still increasing. Due to the challenging environment, it’s also important to highlight that US E&P companies have hedged forward 45% of their 2020 oil production at an avg floor price of $55/boe providing a partial financial resilience. Last but not least, Bank of America calculated that the sector was now underperforming the broader market by the biggest margin in almost 80 years respective since the Pearl Harbour attack.

 

Industrial Metals

The coronavirus outbreak has sparked one of the worst routs in commodity prices in years. Investors are now bracing for even steeper declines – a warning signal about the state of the global economy. Commodities have been among the hardest hit investments since the outbreak began spreading around the globe. Oil prices have fallen 32% in less than two months. Industrial metals from copper to aluminum are also taking a big beating. Same for global stock markets which are struggling to end the worst rout since the financial crisis even as central banks readied stimulus measures to help counter the impact of the coronavirus. The Federal Reserve signaled that its open to easing policy and some strategists expect action very soon. Japan’s central bank offered to buy back government bonds to boost market liquidity, while China may also act after its factory gauge dropped to the lowest on record. Also, there is a gradual reopening of factories across China which should boost activity. Jiangxi Copper Co., the country’s top refined-copper producer, has restored mining and smelting activity as downstream users restart operations and demand returns after an extended shutdown. Mining and smelting running at full capacity as of February 28th, according to the company. Nonetheless, Asia’s factory activity took a tumble last month under the weight of the rapidly spreading virus outbreak, with a severe plunge in China driving down output across the region. Goldman Sachs economists now expect the virus to inflict a short-lived global contraction on the world economy that forces the Fed to slash rates in the first half of the year. According to analysts, the steep declines in mining companies shares are overdone. For instance, iron-ore prices would have to fall from the current $82 a ton to $60 to justify current declines in Rio Tinto and BHP, which are big sellers of this commodity to China. Mining looks very attractive, even if, in the short term, commodity-price declines will hit earnings. Miners have been disciplined on supply, while demand will increase as China and other countries stimulate their economies. According to UBS, the average spot 2020E price-to-earnings multiple for the largest diversified miners is 11.6x and spot free-cash-flow yield for 2020E still averages at 9.96%. The bank expect base metal equities to rebound in Q2 2020, as the profitability, the financial health as well as the overall investment case of most miners is still in place, even after the recent plunge in most commodity prices. As an example of exaggeration, Rio Tinto posted its best underlying earnings since 2011 – the stock lost over 11% in February

 

Precious Metals

Gold closed off February with its steepest daily decline since 2013 and lost over 4.6% on Friday the 28th. Still, gold is up 5.7% year to date and is in demand as a safe haven asset. As financial markets panicked over the spread of the coronavirus, stocks tumbled and dragged gold and other precious metals lower. Back in 2008, spot gold fell by more than a quarter between July and late October, before its run toward $1’900 an ounce, once global rate cuts began in earnest. Last week, the chair of the US federal reserve pledged to act as appropriate to soften the impact of the virus on the economy, paving the way for multiple interest rate cuts, perhaps even before mind-March. With the coronavirus spreading globally and the Fed looking at the possibility of a rate cut, the upward momentum in gold prices is likely to remain intact. The virus-driven turmoil in markets fuels the demand for gold nonetheless, with year-to-date flows into gold-backed ETFs hitting just over 100 tons. The latest push took the total holdings to another record, according to Bloomberg. On the other side, how it plays out in Chinese gold consumption demand is yet to be determined but, according to the World Gold Council, it is all but certain that China’s consumer demand will ease. They expect 1Q20 demand to contract by at least 10-15% if history serves as a guide. Whether demand rebounds or continues to soften will depend on the duration of the epidemic and its impact on economic growth. Nevertheless, according to most analysts, gold’s fundamentals remain overwhelmingly strong and any near-term price corrections aren’t significant in terms of the bigger picture. Investors are said to be cashing out to cover losses and meet margin calls in other markets. Analysts don’t view this recent plunge as a loss in faith in gold’s role as a perceived safe haven or a fundamental shift in the attitude toward gold. For the PGM market, the fallout from the coronavirus outbreak has pushed the price of platinum to a six-month low. Platinum is the worst-performing precious metal in 2020, down nearly 10% year-to-date.The demand for platinum in autocatalyst production accounts for slightly more than one-third of overall demand for the metal. Car sales were weak in Asia and Europe in January, and the spread of the virus will likely weigh on car sales in February and March, too according to UBS analysts.

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ICG Systematic Equity Fund CH Update – Februar 2020

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

 

  • Nach weitgehender Ruhe beim Aufkeimen des Corona-Virus führt dessen Ausbreitung auf den alten Kontinent per Ende Februar zu Panik und Ausverkäufen an den weltweiten Aktienmärkten – Virus wird zum “Schwarzen Schwan”
  • Verkaufswelle erfasst alle Sektoren und Stile – defensive Qualitätswerte mit stabiler Ertragsentwicklung und nachhaltigen Wachstumsaussichten trotzen dem Sturm am besten
  • Angesichts überverkaufter, von Hysterie und hoher Synchronität geprägten Aktienbörsen und einem weiterhin förderlichen fundamentalen Umfeld mit expansiven Zentralbanken, tiefen Zinsen und wieder attraktiveren Bewertungen wird die Aktienquote bei 100% belassen – gesunde Basis für Gegenbewegung
  • Industriegüteraktien mit gesunden Bilanzen bleiben übergewichtet – Zukauf von stabilen Versicherungswerten
  • Auf Stilebene zeigen ICG’s Modelle weiterhin eine Präferenz für Aktien mit tiefer Volatilität und starkem Preistrend von Firmen mit stetiger Cash-Flow-Entwicklung und intaktem Wachstum
  • Hoher Anteil von Small- und Mid-Caps (gegen 50%) sowie Gleichgewichtung der Einzelpositionen führt im Februar zu Underperformance gegenüber dem SPI
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