Mackenzie Minute: November 24, 2017
Benoit Gervais, Head of the Mackenzie Resource Team, says resources are positioned for outperformance in a widening global economic expansion.
BENOIT GERVAIS: We are seeing a continuation of the global economic expansion with, now, emerging markets joining the economic expansion. And for commodities, it means that we are seeing a quick depletion in inventories and, coincident with that, a rise in the commodity prices from the very low that we had seen in 2016. Now we see most commodities trading at or near mid-cycle level. Copper is leading and oil is probably lagging.
We like to remind our clients that economic expansions do not die of old age but, rather, they need to die of overheating. And many conditions have to be present for you to expect an end to this economic cycle. To be a bit more precise, here are four or five conditions that you should look out for: capital expenditures have to accelerate, wages have to accelerate, inflation has to be present, the yield curve has to invert, housing sales and auto sales all have to peak. None of those conditions is present today which allows us to think that there is at least another 12 to 18 months to this economic expansion.
So as long as this economic expansion stays on course, demand stays strong for commodities, obviously. But supply has been anemic through this and that’s the result of many years of under-investment, so we have a pretty ideal set of circumstances for resources in general. As such, as you enter the last stage of this economic expansion, we would expect resources to outperform the broad market.