Mackenzie Minute: March 9, 2018
Portfolio Manager Onno Rutten says the Mackenzie Resource Team is watching for indicators of more global economic growth while gauging market confidence in the pricing of resource equities.
ONNO RUTTEN: The economic cycle has entered its later stage with strong economic growth in Europe, China, the US and also in the emerging markets. Indicators of industrial activity continue to suggest that we'll see strong economic expansion ahead. This is normally the sweet spot for investing in resource equities, as this is the stage of the economic cycle where we normally have most of our returns.
We are looking for indicators that the economy has more capacity to grow. One of those indicators is inflation, which has returned to more normalized levels. And we are seeing some US policies which are mildly stimulative for inflation. To us this suggests that the economy is getting closer to capacity, but is not yet running above capacity, and we therefore have time in this economic cycle. Inflation can be a headwind for financial markets but we do normally observe that resource equities outperform the broader markets during periods of rising inflation.
Most commodity prices, including oil, aluminum, copper and lumber, have returned to mid-cycle pricing, or even higher. This is due to strong demand but also due to the decade of under-investment in the supply of these commodities. To date, however, equities have seen very narrow participation in this commodities rally. The reason for this is that the market needs to develop confidence that these prices can be sustained for a longer period of time. Once the market develops that confidence, we expect a re-rating in resource equities, which would benefit the Mackenzie Resource funds.