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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ICG Commodity Update – January 2020

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

Energy

China’s commodity industry, the world’s leading consumer of raw materials, is ensnared in chaos as the coronavirus delivers the worst demand shock since the global financial crisis. Trade in almost every major commodity is at risk. Oil demand has plunged 20% and refineries are curbing operations, liquefied-natural-gas buyers are reneging on deals, coal mines are staying shut, copper smelters are mulling output cuts, and crop cargoes are getting stuck at ports. The drop in Chinese oil demand equals about 3 million barrels a day, according to people with inside knowledge of the country’s energy industry. China is the world’s largest oil importer, after surpassing the US in 2016, so any change in consumption has an outsized impact on the global energy market. The country consumes about 14 million barrels a day. The collapse in Chinese oil consumption is starting to reverberate across the global energy market, with sales of some crudes slowing to a crawl and benchmark prices in free-fall. Sales of Latin American oil cargoes to China came to a halt by the end of January, while sales of West African crude are also slower than usual. Sinopec Group, the nation’s biggest refiner, is in the process of reducing runs at its plants by an average of about 13%-15%. Also, independent oil refineries may be cutting rates or shutting completely as storage fills up, according to traders familiar with operations at the plants known as teapots. OPEC and its allies are gathering for an urgent assessment of how Asia’s coronavirus may hurt oil demand, and what measure they could take in response. Technical experts from the OPEC+ coalition will meet at the cartel’s headquarters this week to evaluate the impact.  The officials’ assessment may help determine whether the alliance convenes an emergency ministerial meeting later this month to consider new production cuts. Saudi Arabia has been pushing for such a gathering, but has faced some reluctance from Russia. Moscow doesn’t face the same budgetary need for elevated oil prices as most OPEC members. The energy minister had said last week that the country is prepared to meet this month, and intervene if necessary, though it prefers to continue monitoring the situation. Still, the outlook is not all negative. Banks including Citi have flagged the potential for stimulus measures. Goldman Sachs analysts said they see only modest further downside potential as the sell-off has already priced in a larger hit to economic growth than they are expecting.

 

Industrial Metals

Investors have deserted raw materials around the world over fears about the economic fallout from the corona virus. More than a dozen Chinese provinces have announced an extension of the New Year holiday by more than a week in a bid to halt the spread of the virus that has killed hundreds of people and sickened thousands. According to analysts, investors are seeking risk-aversion assets. Fears over the effect that’s going to have on demand and supply balances had hammered global prices from copper to iron ore while Chinese market were shut – copper on the LME capped its worst month since 2015. After the 12-day slump, copper jumped on Monday ending its longest sell-off on record. The market moves underscore expectations that China may look to stimulus measures to reduce the economic hit from the virus outbreak that has shut down some of its major cities. Manufacturing typically picks up after the New Year. China reduced rates as it injected cash into the financial system, with the central bank seeking to ensure ample liquidity as markets plunged. Citigroup said the virus outbreak is expected to put Chinese metals demand growth on hold for much of this quarter, although there will be a major rebound in the second half on potential policy easing from the government. Some analysts see the slump in LME prices as excessive, and some downstream consumers are buying to replenish stockpiles. If you look at the fundamentals, years of limited mining capex have made the supply side vulnerable to unexpected production outages. Especially in copper and nickel, analysts see great supply risk. The challenges to copper output are multifaceted (technical, political, social and environmental) and spread across all regions. Nickel is expected to remain in deficit beyond 1% of annual demand in 2020. The story for higher nickel prices is strongly tied to Indonesia’s nickel ore ban. The lack of Indonesian nickel ore is likely to weigh on China’s NPI production toward the end of this year and in 2021. Before the virus hit, most base metals were a 2020 favorite for analysts including those at Goldman Sachs, Jeffries and Citigroup. Easy monetary policies worldwide, the preliminary US-China trade deal and mine supply that is expected to lag behind demand in coming years were among reasons given for the bullishness, and those pieces are still in place should the outbreak prove less severe than feared. Parallel to the slide in metal prices, miners and steelmakers plunged as risk-off sentiment hit equity markets.

 

Precious Metals

In contrast to industrial metals and energy products, gold was boosted as worries mounted over the potential global economic impact of the spread of the coronavirus. Those concerns helped burnish gold’s appeal as a haven as investors shunned risky assets. According to analysts, gold has been in a strong uptrend since early December, largely due to the significant monetary stimulus from central banks around the world. Nonetheless, the shiny metal slipped from a three-week high amid concerns the coronavirus could hurt jewelry sales in China. According to analysts, there’s a risk that Chinese shoppers will buy less gold jewelry, especially if the virus follows a similar path to SARS. Retail coin and jewelry demand in Asia is a negative risk for gold markets, particularly in China where gold premiums have started to soften given GDP downgrades and coronavirus risks. Still, investor demand for bullion as a safe haven could offset weaker Asian consumption, Citigroup said. All virus concerns beside, precious metals remain a story linked to easy monetary policy globally and broad US dollar weakness. Real interest rates, particularly in the US, are an important driver for gold due to the metal’s non-yield-bearing status, the lower real rates go, the better its price outlook. Apart from low US real rates and a weaker US dollar, gold should benefit from any sudden spikes in market volatility due to late-cycle dynamics and ongoing geopolitical noise, especially during the 2020 presidential election.

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ICG Systematic Equity Fund CH Update – Januar 2020

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

 

  • Erster Schritt in der Beilegung des Handelsstreits zwischen China und den USA beflügelt Aktienmärkte nur kurzzeitig – die Angst vor den Effekten des Corona-Virus sowie ein zu hoher Optimismus unter den Anlegern wirken als Bremse
  • Starke Rotationen zurück in defensivere Sektoren trotz ihrer im historischen Kontext grossen Bewertungsprämien – Investoren suchen angesichts der wieder rückläufigen Zinsen die Rendite bei Dividenden von Unternehmen mit stetiger Ertragsentwicklung
  • Aktienquote wird angesichts eines zu geradlinigen Anstiegs der Börsen während der letzten Monate auf 75% gesenkt – Fundamentales Umfeld ist, getrieben von wieder expansiveren Zentralbanken, so förderlich für Aktien wie zuletzt Anfang 2018
  • Übergewicht in Industriegüteraktien wird beibehalten – keine Allokation in “Banken”
  • Auf Stilebene zeigen ICG’s Modelle weiterhin eine Präferenz für günstig bewertete Titel mit starkem Preismomentum von Unternehmen mit stetiger Ertragsentwicklung an
  • Systematic Equity Fund CH schlägt den Swiss Performance Index (SPI) seit Lancierung am 03.09.2019 dank einer guten Titelselektion und einer guten Asset Allocation nach Kosten
  • Signifikanter Mehrwert auf risikoadjustierter Ebene infolge einer tieferen Volatilität als beim Referenzindex SPI
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ICG Commodity Update – December 2019

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

Energy

It has been a difficult time for anyone betting on oil. In the past year ample oil production, trade disputes, fears of an economic downturn and climate change discussions have weighed on the price of crude. Yet by year-end Brent crude ended at $66/bl up 20% over 2019. The sector was recently aided by China-US trade resolution, UK election removing Brexit uncertainty and a slew of energy data reports from the EIA, IEA and OPEC that screened mostly positive. Further to that OPEC and its allies agreed to lower output by more than 2.1mboe/d and Saudi Aramco, the world’s biggest oil company, listed 1.5% of its shares. By mid-December its market value surpassed an astonishing $2trn adding to optimism in the sector. However, geopolitics took once again the centre stage, lifting crude oil prices to $70/bl at the beginning of 2020. The US drone strike that killed Major General Suleimani, the commander of Iran’s Revolutionary Guards, was only the latest in a string of increasing regional tensions over the last 12 months (attacks on oil tankers, Iran shooting down US drone, strikes against Saudi oil facilities, attack on the US embassy in Iraq). And while the market has largely shrugged off the implications to oil over this time (and for most of the last 4 years), the potential difference today is the escalation into a tighter global market caused by a material slowdown in US supply growth and the likelihood of a rising call on OPEC by 2H20 – the first in years. The market is increasingly concerned that the tensions between Iran and the US could impact the political stability of Iraq and the oil production in the 2nd largest OPEC producer. Supply disruptions there or elsewhere in the region would hasten the drawdown in global inventories and backwardation of prices occurring due to the revival in global demand on China stimulus and OPEC 2.0 production cuts. As we have highlighted multiple times, the market has largely ignored the steady signs of increasing geopolitical risk in recent years.

 

Industrial Metals

Industrial metal prices have been recovering in December. This helped the LME Index to end the year 2019 in positive territory up 1.5% through the year. Reduced policy uncertainties regarding the US-China trade conflict, Brexit developments alongside better than-expected economic numbers have been important in pushing metal prices higher. Increased confidence in a stable to stronger growth outlook for 2020 is setting the backdrop for a potential recovery in global capex. With the support of monetary and fiscal policies in 2020, hard economic data (like industrial production) should follow softer data (like firmer manufacturing PMIs), particularly in Asia. In short, growth in Asia should still accelerate this year according to most analysts. In China, which is a major consumer of base metals, housing activity is expected to hold up in 1H20, and infrastructure investment and industrial production activity should gain greater traction. The resulting pick-up in industrial metal demand, particularly from 2Q20 onwards, holds the key to another round of lower visible inventories. It’s important to note, that metal inventories at exchanges remain structurally low. The destocking of inventories more broadly reflects ongoing supply challenges that have gripped copper and aluminum supply, and to a lesser extent zinc supply, in 2019. Hence, the question is whether supply will again underwhelm in 2020. In the case of copper, supply challenges in Chile and Africa require close tracking. Also, copper smelters suffer from depressed margins. Citigroup forecasts China’s copper demand will expand 2.6% this year, underpinned by gains in grid investments. As for nickel, the impact of Indonesia’s ore ban on China’s nickel pig iron production is another topic that should weigh on nickel availability towards end-2020, but mainly in 2021. In aluminum and zinc the bulk of supply growth largely hinges on China, where investors should keep an eye on policy changes. UBS expects most base to be in deficit in 2020. At the beginning of 2020 the US airstrike against one of Iran’s most powerful generals sent oil and precious metal prices firmly higher, while negatively affecting risk assets like industrial metal prices. Nevertheless, UBS is positive on base metals as economic growth in Asia will not be affected by the developments in the Middle East. Also Goldman Sachs said it remains bullish on copper.

 

Precious Metals

Gold prices rose to the highest levels in nearly seven years as investors drove cash into safe-haven assets around the world amid rising military and political tensions in the Gulf region followings last week’s killing of a key Iranian military commander in Iraq. With risk markets retreating following the killing, safe-haven assets such as gold, US Treasury bonds and other precious metals have been rising sharply. Iran’s decision to roll back some of its commitments on uranium enrichment linked to the 2015 non-proliferation treaty, as well as Trump’s warning that any reprisal attacks from Tehran could be met with a “disproportionate” response, has only added to the upward pressure on gold which has gained nearly 4% over the past week. According to analysts, further escalation could trigger more upside in prices, but the rally risks running out of steam as liquidity returns to the market after the New Year break. Palladium has also benefited from the optimism surrounding havens, as well as its own positive fundamentals. The metal is in a multiyear deficit as demand rises in auto catalysts amid stricter emissions standards.

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ICG Systematic Equity Fund CH Update – Dezember 2019

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

 

  • Aktien legen den vierten Monat in Folge zu – getrieben von einer expansiven Geldpolitik der weltweiten Zentralbanken und einem gesunden psychologischen Marktumfeld steigt der Schweizer Aktienmarkt (SPI) im Jahre 2019 um über 30%
  • Gesunder Risikoappetit der Investoren führt im Dezember zu einer Fortsetzung der Rotation in zyklische Branchen und kleinkapitalisierte Werte
  • Alle 4 ICG-Modelle für die Asset Allocation liefern grünes Licht für Aktienanlagen – Aktienquote von gegen 100% im Systematic Equity Fund CH
  • Übergewicht in Aktien aus dem Industriegüterbereich und der Baubranche wird beibehalten – geringe Allokation in defensiven Sektoren “Gesundheit” und “Nahrungsmittel”
  • Auf Stilebene zeigen ICG’s Modelle weiterhin eine Präferenz für günstig bewertete Titel mit hoher Volatilität und starkem Preismomentum an
  • Systematic Equity Fund CH schlägt den Swiss Performance Index (SPI) seit Lancierung am 03.09.2019 dank einer guten Titelselektion wie auch einer guten Asset Allocation (Aktienquote von durchschnittlich rund 84% seit Auflegung) um 2.53%
  • Signifikanter Mehrwert auf risikoadjustierter Ebene infolge einer tieferen Volatilität als beim Referenzindex SPI
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ICG Commodity Update – November 2019

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

Energy

For energy investors this week should be adventurous with the OPEC meeting in Vienna on Thursday and Friday that will likely provide some theatrics. According to most surveys market participants expect OPEC+ to extend the current supply pact (which expires at the end of March 2020), rather than make deeper reductions. Deeper cuts seem unlikely at present, but production would likely stay low if the group succeeds in convincing countries with weak compliance to implement their pledged cuts. While some oil ministers might propose deeper cuts as an option ahead of the meeting, negotiating them has always been cumbersome. Though the average OPEC+ compliance rate is currently 136% according to the IEA, the distribution among members is unequal: some OPEC+ members (e.g. Iraq and Nigeria) have raised their production (resulting in a negative compliance rate), while the de facto OPEC leader, Saudi Arabia, has cut more than twice what it pledged. Indeed, reports surfaced last week that Saudi Arabia is growing frustrated with other OPEC members cheating on their production quotas. This combined with comments from Russia that they favour wait until closer to April to decide whether to extend output cuts contributed to a 5% decline in crude oil last Friday. Even so, crude oil prices have risen during the month and ended slightly positive in November benefiting from positive trade headlines and falling oil inventories. Some analysts believe the world’s supply and demand balance could be tighter than some expect. They see non-OPEC output growth falling short of forecasts while global demand increases could be higher than expected. Hardy from Vitol Group, the world’s largest independent oil trader, recently said “The market’s fear of a global recession has receded. There are problems here and there, but in general the music hasn’t stopped and demand didn’t follow the 2008 model”. A steady decline in US drilling activity also raises the question if US oil supply growth for next year, could fall short of market expectations. Across the industry, oil traders and executives believe US production will grow less in 2020 than this year, and at a significant slower rate than in 2018. E.g. Vitol Group expects US production to increase by +0.7mboe/d in 2020 vs. IEA +1.2mboe/d, EIA +1.7/mboe/d. Apple is now worth more than all large-cap US energy stocks put together. This is astonishing, considering that the Oil Majors have the highest dividend yield, by far, of any major sector in the S&P (~5% yield vs. ~2% S&P average), with competitive growth, leverage, FCF, and have received almost no credit for significantly transforming the business/cost structure over the past 4 years to make that FCF sustainable and growing.

 

Industrial Metals

Despite the seemingly interminable back-and-forth between US and Chinese negotiators working on phase one of the trade deal, base metals prices are signaling a revival of global economic growth, particularly in EM economies, in 2020. Fundamentally, most global base metals inventories continue to draw hard, as the rates of growth in consumption and production diverge. Any recovery in organic growth could spark a rally. Supply in the biggest components of the LMEX, copper and aluminum, is contracting, while demand is holding up or slightly growing. This causing global stocks to draw, as incremental demand is met from inventory. According to analysts, base metals consumption is expected to move higher next year – part of this will be led by improving Chinese demand, which accounts for more than 50% of base metals demand globally. Base metals markets continue to tighten, as supply growth remains significantly behind demand growth. Looking at nickel, the rally is fading fast as signs of faltering demand left the metal with the biggest monthly loss among major commodities. Prices have declined 18% in November on the LME. The rout has sent nickel tumbling from near five-year highs seen a few months ago as supply anxiety swept through the industry in the wake of Indonesia’s decisions to expedite a ban on exports of raw ore. Producers in Indonesia have been boosting shipments to China in the run-up to the January ban, causing inventories to build throughout the steel industry, while the strain on demand grows.

 

Precious Metals

Gold declined in November while data on China’s economy pointed to an improvement, curbing demand for havens as equities rose. Investors also assessed the latest on trade, with newspapers reporting that Beijing wants tariffs to be rolled back as part of a phase-one trade deal with the US. A gauge of China’s manufacturing jumped unexpectedly in November, signaling a recovery in activity amid state support and stabilizing global growth. The official manufacturing purchasing managers’ index rose to 50.2, according to Bloomberg. Also, demand for US business equipment unexpectedly increased in October by the most since the start of the year, while revised gross domestic product for the third quarter showed growth in slightly better shape than previously thought. The monthly price drop is the biggest in three years. Looking at Palladium, prices steadied after climbing to a record on expectations its eight-year supply deficit will widen next year. Palladium supply has trailed demand since at least 2012 and prices are up 45% this year on expectations that a shortage will continue. Norilsk Nickel, the world’s top miner of the metal, said that global demand growth for the commodity will accelerate in 2020 and a deficit could be more substantial on an anticipated recovery in the auto market and tighter emissions legislation. Palladium has expanded its premium to platinum to a fresh record, being more than twice more expensive currently.

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