Q1 2018 Commentary – Mackenzie Resource Team | Mackenzie Investments

Q1 2018 Commentary

Mackenzie Resource Team

Highlights

  • Synchronized global growth persisted through the first quarter of 2018 despite some moderation in growth rates from elevated levels in late-2017.
  • Oil prices responded positively to a counter-seasonal decline in inventories during the first quarter. We continue to expect a large re-rating to be in the making should current prices be sustained.
  • Equity markets were volatile over the quarter; partially due to concerns about the re-emergence of inflation and the associated pace of monetary tightening in a post-QE world, both in the U.S. and Europe.

Market Review

  • Synchronized global growth persisted through the first quarter of 2018 despite some moderation in growth rates from elevated levels in late-2017. We believe the second quarter of 2018 should provide confirmation that this moderation was largely attributed to seasonal effects in the Northern hemisphere and spring rebound is likely.
  • Tightening labour markets have - to date - only resulted in modest wage growth; however, wage demands appear to be accelerating. Hence, government tax receipts are anticipated to improve accordingly, while private sector investment is showing tentative signs of a new capex cycle. Both of which should further stimulate demand for resources. Possible spoilers could come from continued tariff discussions and cause some corporations to delay their capital commitments.
  • Equity markets were volatile over the quarter; partially due to concerns about the re-emergence of inflation and the associated pace of monetary tightening in a post-QE world, both in the U.S. and Europe. Historically, episodes of rising inflation, good global economic growth, and a gradual flattening of the treasury yield curve have resulted in a rotation within equity markets that favor cyclical sectors such as the resource sector. We continue to expect the current economic cycle to unfold accordingly, albeit at a slower-than-normal rate of change.
  • Oil prices responded positively to a counter-seasonal decline in inventories during the first quarter. Oil demand, boosted by strong economic global growth, has surprised consensus to the upside whereas production discipline from OPEC/Russia has resulted in a substantial market deficit. Global inventories now stand below the 5-year average, pushing oil prices closer to our estimated mid-cycle price level. Energy equities remain in bargain territory, in our opinion, and are lagging the improved oil price as the market likely awaits further confirmation of the sustainability of higher oil prices and/or a possible supply response. We continue to expect a large re-rating to be in the making should current prices be sustained.

Outlook & Strategy

  • Global leading indicators continue to point towards a solid economic outlook; with capital expenditure intentions building in the background suggesting even more growth ahead. The current lack of inflation and the lack of accelerating loan growth suggests there might be more time to the current economic cycle. All the above signals provided a strong backdrop for commodity demand at a time when supply remains constrained from years of reduced investment. Resource equities appear broadly undervalued relative to their underlying commodities, especially in the energy sector. The portfolio managers continue to monitor several key indicators for warning signs that the cycle could be reaching maturity, including: inflecting wage growth, accelerating inflation, peaking capital expenditures, peaking global home and auto sales, and yield curve inversion. Until some of these indicators manifest themselves, more growth should be expected from the world economy and should benefit resource equities.

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This document includes forward-looking information that is based on forecasts of future events as of March 31, 2018. We will not necessarily update the information to reflect changes after that date. Risks and uncertainties often cause actual results to differ materially from forward-looking information or expectations. Some of these risks are changes to or volatility in the economy, politics, securities markets, interest rates, currency exchange rates, business competition, capital markets, technology, laws, or when catastrophic events occur. Do not place undue reliance on forward-looking information. In addition, any statement about companies is not an endorsement or recommendation to buy or sell any security.

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