The natural-resources sector may still be a winning bet, despite concerns that the prices of stocks focusing on commodities and resources have run up too fast in an economic environment where demand is still slack and inventories remain high.
Last year's eye-popping gains — 48.83% for Morningstar Inc.'s natural-resources-fund category, nearly twice the 26.46% increase in the S&P 500 — is a sign that the run in natural resources isn't over, bulls say.
The long-term cyclical upturn in commodity markets looks to be back in gear, said Brad Zigler, managing editor of hardassetsinvestor.com.
“You still have the basic underpinnings for an increase in commodity prices,” he said.
“Commodities are a good place to be,” said Chris Lamb, principal of Old Mission Investment Company LLC, which manages nearly $300 million. He is among those who maintain that supply constraints, improving demand and inflationary policies, as well as rapid growth in Brazil, Russia, India and China, make the -natural-resources sector a solid bet.
Not all are so sanguine, of course. Bears note the volatility of the sector and point to the dismal results of 2008, when the Morningstar group of natural-resources funds lost 48.58%, about 11 percentage points worse than the S&P 500's slide.
“There's now a disconnect between prices and the underlying fundamentals” of commodities, said Edward Meir, a senior commodities analyst at MF Global Inc. He pointed to bearish fundamentals and growing inventories as factors that should put downward pressure on prices.
“Copper inventories are at nine-month highs, and we're swimming in oil,” Mr. Meir said.
But excess inventories are a hangover from the
recession and won't last as demand picks up, bulls said.
“People forget that every three decades or so, we get these big cycles” when commodities are in short supply and outperform financial assets, said Tim Parker, investment analyst at
T. Rowe Price Group Inc., who in June will take over as portfolio manager of the
T. Rowe Price New Era Fund, which focuses on natural resources.
“I think we're just coming out of a midcycle [commodities] correction,” he said.
Mr. Parker thinks that it will be three to five years before the run-up in commodities is over.
Of course, if the BRIC nations, particularly China, stop growing, the bullish story could change. In recent weeks, China has taken several steps to curb excessive growth.
But even if growth rates in China and other BRIC nations come down, demand for resources still eventually will outstrip supply, commodities bulls said.
Once a country's gross domestic product per capita rises about $3,000, demand for commodities rises sharply until the $15,000 to $20,000 level is reached, Mr. Parker said.
China's per-capita GDP is about $3,000 today, “so you've got this wind of demand at your back,” he said.
Observers expect that oil could be the big winner in the years ahead.
“Long-term, the thesis that we have an oil-constrained world gets more powerful,” said Daryl Jones, managing director and commodities analyst at Hedgeye Risk Management LLC, formerly known as Research Edge LLC, an independent-research firm.
Although supplies are plentiful in the short term, “based on the models we look at and absent an elongated recession, we're going to have a real tight supply situation” within the next three years, he said.
Worldwide demand for oil dropped to 82 million to 84 million barrels per day during the recession, from 87 million, said Eric Chenoweth, an associate director of stock analysis at Morningstar Inc. who covers energy companies.
But China had a big jump last year — its first since 2004 — he said, from a range of 6 million to 7 million barrels up to 8 million to 9 million, due to government-stimulated auto sales.
“We say China is eating steel and drinking oil,” said Mr. Lamb, who puts about 5% of his clients' portfolios into the Jennison Natural Resources Fund (PGNAX) for commodities exposure. The fund is managed by Jennison Associates LLC.
Meanwhile, demand from developed countries has stabilized and is coming off its lows, and with Middle Eastern and Latin American demand coming back, “we could be pushing supplies pretty hard,” Mr. Chenoweth said.
As oil fields become depleted, supplies must increase 4% to 6% a year, Mr. Parker said. But oil-producing projects planned for 2011 and 2012 “fall far short” of meeting that need.
Oil prices could get back to around $140 per barrel within the next three years, Mr. Parker said.
Of course, oil isn't the only commodities play.
Gold is a bet on the uncertainty of the dollar, said Brad Zigler, managing editor of hardassetsinvestor.com. Demand from a growing number of money managers who want exposure has helped drive up the yellow metal, he said.
Like oil, long-term copper supplies are also constrained, Mr. Jones said.
China and India have driven demand for metals, Mr. Zigler said, and China in particular has been “stockpiling a lot of materials to fund construction projects.”
Financial advisers of course can play the natural-resources theme with any number of mutual funds and exchange-traded funds that offer exposure.
For single-country plays, Mr. Jones likes China for its capitalist policies and strong balance sheet but worries about an economic slowdown in the short term.
India has a high growth rate but has inadequate infrastructure, and “we don't
trust [Indian] policymakers to make the right decisions,” Mr. Jones said. Russia is “just a bet on oil,” he added.
In terms of individual stock picks, Mr. Chenoweth likes ExxonMobil Corp. (XOM), saying that it is tops among the major oil producers. The company's acquisition of XTO Energy Inc., announced last month, “puts it well ahead of the curve to attack unconventional [natural-]gas resources,” he said, and ExxonMobil is also well-positioned in Asia.
Although the U.S. natural-gas market is oversupplied, “long-term, I'm more excited, because as coal-fired [power] plants get old, they'll likely get replaced” with natural-gas-powered plants, Mr. Chenoweth said.
He also likes Spectra Energy Corp. (SE), a natural-gas processor and shipper, saying that “its footprint is really good to attack new regions” for pipelines.
Mr. Parker likes FMC Technologies Inc. (FTI) and Schlumberger Ltd. (SLB) in the oil services industry, and Murphy Oil Corp. (MUR) and Suncor Energy Inc. (SU) among the producers.
E-mail Dan Jamieson at [email protected].
