How to ride the resources cycle

With fluctuating oil prices continuing to make news, Chris Butler, co-manager of the Martin Currie Global Resources fund, looks at the wider supersector.

The resources supersector has been much in the news this year, mostly in connection with the price of oil. As political unrest spread across the Middle East and North Africa, becoming civil war in Libya, Brent crude rose from $93 a barrel at the beginning of 2011 to a peak of almost $127 a barrel at the start of May.

But in little more than a week, the price has tumbled back to $110 a barrel, on weakening US economic data and tightening monetary policy in China. And although demand fundamentals appear positive on a medium-term view, it is hard to say where the current slide will finish.

Not just about the oil price

Fortunately, investing in resources equities is much more than a simple bet on commodities. Contrary to a widely held misconception, it is not all about the oil price. While many think of the resources universe as little more than a tightly correlated set of energy and mining stocks, it actually extends well beyond primary producers to include downstream processing and parallel value chains in areas like forest products and building materials; we also consider engineers, service companies, shippers and makers of alternative energy equipment.

Yes, they are all linked, but they do not all move at the same time. As 2008 taught us, even oil companies – never mind the many other, less correlated, areas of the supersector – can outperform the wider market when the price of oil plummets. After the collapse of Lehman Brothers, integrated oil majors like ExxonMobil, Chevron and Total did well in absolute as well as relative terms, despite a $100 drop in the oil price.

As bottom-up stockpickers, we see change at the company level, not fluctuations in commodity prices, as the main driver behind the movement of shares over the long term. Our experience tells us that change (improving pricing power or corporate restructuring, for example) is something the market systematically underestimates.

In an investment universe plagued by misconceptions, perhaps the biggest is that publically available information is factored into share prices quickly and efficiently – it is not.

We repeatedly find examples of data being ignored or interpreted differently across regions and sectors. It is these inefficiencies that allow evidence-based investors to find opportunities in a range of market environments – whichever direction the price of oil is going.

Looking for opportunities

Where, then, in this vast and inefficient investment universe do the greatest opportunities currently lie? The answer, as always, straddles a range of sectors. While we focus on the prospects for individual stocks rather than sectors, several areas are producing more good ideas than the rest.

For some time now, our fund has had substantial exposure to oil services, which stand to profit from increasing capital expenditure from oil companies. And as has been the case for several quarters, we remain bullish on the prospects for global gas producers. The disconnection between oil and gas prices looks unsustainable, given the relative attractiveness of natural gas as a fuel.