Commodity and resources equity market’s reaction overnight
Commodity markets have responded well (for now at least) to news of a Trump US presidential victory on the view that commodity demand will potentially benefit from a lift in infrastructure spending and fiscal stimulus. Following the result, iron ore increased by 4%, copper rose by 3.5%, with further gains in nickel (+2.8%). In London trading, Rio Tinto was up 6.8%, BHP +4.6% and Glencore +6.8%. Freeport (+7.7%) and Antofagasta 8.9% also recorded strong gains as the copper price reached a 15-month high. Surprisingly, gold closed relatively flat, but initially rose sharply as the markets struggled to understand the implications of the new leadership direction. US steel names were among the strongest performers with Nucor up by 12.2% and Steel Dynamics +10%. Oil and natural gas recorded small gains of between 0.5-1%.
Commodity markets price in policy over fear
On the policy front, Mr Trump has pledged not to defend the Clean Power Plan in the US Supreme Court. This could pave the way for states to return to a power mix more reliant on fossil fuels. On the emissions side, his proposals to roll back emissions-reduction targets and pull out of the Paris agreement would at face value suggest greater demand for coal and less commitment by signatories to meet their emissions targets. Structurally, this will support gas demand as less policy uncertainty will incentivize investment in an already competitive source of power and petrochemicals. Less regulation on more available drilling locations would be supportive of US oil and gas production. Mr. Trump has already referred to US$33bn of energy projects that have been impeded by a combination of regulations, local opposition and falling energy prices.
Cyclically, higher fiscal spending in the US will benefit construction activity, although the impact will be subject to the size of this infrastructure stimulus (circa US$300bn). We would expect this to benefit steel, iron ore, nickel, copper and zinc producers.
President-elect Trump has been a vocal opponent of trade agreements. While it remains to be seen whether the new administration pursues restrictive international trade policies, US importers could potentially be more hesitant to bring in foreign tons, even where trade cases haven’t been successful or yet filed. This can provide a sharp boost to US steel companies. For example, Nucor’s production of rebar, plate, and beams, about 40% of its total, where prices have been depressed. If Mr Trump follows through with import tariffs on China and reverse trade deals, we could see emerging market economies like China face downside risks, which have a greater bearing on demand for mining commodities.
Mr Trump’s proposal to cut corporate tax to 15% and increased defence and military spending (circa US$450bn) will likely benefit US-based producers.
Gold prices have retraced most of its election night gains and the outlook remains mixed. The behaviour of the gold price overnight just goes to show how unpredictable risk events are for safe haven assets like gold. Fiscal and geo-political uncertainty and potentially inflationary fiscal spending and import tariffs could lend support to gold, while stronger growth and rising interest rates could in turn be bearish. The position of US Federal Reserve Janet Yellen remains uncertain.
Renewables with heavy US exposure may face some challenges, but we remain optimistic on global copper demand from the sector. Vestas Wind Systems, the world’s largest wind turbine manufacturer, has seen its share price decline given its US exposure. As a sceptic on climate change, Mr Trump’s speech in Gettysburg on the 22 October 2016 implied that his administration could be less friendly to the renewables sector.
In our view, 2017 is now even more likely to see a continuation of the factors which have supported commodity demand through 2016. Most notably, Chinese liquidity as the Beijing government continues with its policy support amid heightened global macro risk. Mr Trump’s victory has cleared a path for more fiscal stimulus, both in the US and beyond, which will augment commodity demand through stocking cycles, even though the demand itself will take time to come through. Indeed, we may be looking at a period when both China and global demand is strong at the same time, which is certainly supportive of metals pricing. Copper would be a clear beneficiary of this, while the wider uncertainty could also see gold well supported, though rising bond yields present an obstacle.
The fund was well positioned for an unexpected Trump presidential victory. Unofficially, the fund marginally underperformed its customised benchmark, but produced positive returns in an extraordinarily volatile trading session. Our underweight position in Mexican copper and transport conglomerate Grupo Mexico added value. Defensive oil super major Exxon Mobil was resilient. Our underweight and zero positions in diversified miners Rio Tinto and Anglo American detracted from relative returns in a rallying commodity environment.
In terms of our positions, the market rallied very hard last night causing us to be cautious. We consider the following high conviction names already held by the portfolio to be potential beneficiaries of a Trump Republican Presidency in the near term:
–) First Quantum – leveraged to the spot copper price.
–) Concho Resources, Canadian Natural Resources and Suncor Energy – oil sands (Trump is a supporter of Keystone XL).
–) Halliburton, Schlumberger and Patterson-UTI Energy – North American oil service companies.
–) Nucor and Steel Dynamics – US steel companies who benefit from increasingly protectionist trade policies.
–) Southern Copper and Fresnillo – weak Mexican Peso are tailwinds for these producers.
–) Grupo Mexico and Penoles – potentially a buying opportunity on weakness given their Mexican-based exposure.
–) Arconic and Kaiser Aluminium – leveraged to increased defence, aerospace and military spending.
–) Newmont Gold (currently underweight) – a possible proxy for US investor gold investing.
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