Resource equities have historically shown a low to negative correlation to the broader market, which might appeal to bears. The reason? When metals and energy have risen in price, it’s been a drag on the economy. The reverse has also been true: Low prices have been a boon to the economy.
The thing is, general equities currently do not give investors enough exposure to natural resources. The weight of energy and metals in the S&P 500 has been halved in the last few years as oil and other materials have declined. Considering the diversification benefits, investors should consider a greater allocation to the sector.
Timing Is Key
There’s mounting evidence that now might be an opportune time to get back into resource stocks. Following the sharpest decline in crude oil prices in at least a century, as well as a six-year bear market in metals, the global environment could be ripe for a commodity rebound. From its January trough, the Bloomberg Commodity Index has rallied 17 percent, suggesting commodities might be seeking a path to a bull market.
During the down-cycle, many companies managed to bring costs lower, upgrade their asset portfolios and repair their balance sheets. As a result, many of them are now free cash flow positive and are in a much better positon to deliver on the bottom line when commodity prices increase.
I’ve often written about the imbalance between monetary and fiscal policies. My expectation is that unprecedented, expansionary global monetary policy will be followed by fiscal expansion. Consider this: Total assets of major central banks—including those in the U.S., European Union, Japan and China—have skyrocketed to $17.6 trillion dollars as of August 2016, up from $6.3 trillion in 2008.
nfrastructure Spending About to Increase?
China largely drove the global infrastructure build out over the past decade as rapid economic growth and rising incomes increased the demand for “advanced” and “quality of life” infrastructure. This resulted in a breathtaking commodities bull market.
Now, other advanced countries, the U.S. especially, are readying to sustain the next cycle to repair its aging and uncompetitive infrastructure.
As you can see, most major economies dramatically cut infrastructure spending after the financial crisis, indicating it might be time to put some of that $17.6 trillion to good use.
According to the Center on Budget and Policy Priorities (CBPP), the U.S. is presently facing a funding gap of $1.7 trillion on roads, bridges and transit alone—to say nothing of electricity, schools, airports and other needs. Meanwhile, state and local infrastructure spending is at a 30-year low.
If this financing can’t be raised, says the American Society of Civil Engineers (ASCE), each American household could lose an estimated $3,400 per year. Inefficient roadways and congested airports lead to longer travel times, and goods become more expensive to produce and transport.
Let’s look just at national bridges. After an assessment of bridges last year, the American Road & Transportation Builders Association (ARTBA) found that 58,495, or 10 percent of all bridges in the U.S., are “structurally deficient.” To bring all bridges up to satisfactory levels, the U.S. would currentlyneed to spend more than $106 billion, which is six times what was spent nationwide on such projects in 2010.
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