Tom Nelson, Investec
London-based Nelson, who manages the Investec Global Natural Resources Fund, said fossil fuels are still under a consumption demand, despite a developing trend to use low-carbon substitutes.
The steady demand can be explained, in part, by developments in car ownership. On the one hand more buyers opt for electric vehicles, but on the other the ownership of sport-utility vehicle (SUVs) is also growing, Nelson told FSA.
“It is a very unusual observation: we see the same in China, in Norway, and in California,” he said. “Part of that is a response to the low oil price. People want to buy bigger cars as there is still an aspirational image of big trucks.”
He said people who can afford electric cars typically also own a car that burns fossil fuels, as electric cars usually are meant for city commuting.
Oil price to remain stable
In addition to the persistent demand for oil, natural resources miners and producers should do well this year because of a better capital allocation, resulting in a better profitability.
“If they manage the costs, stop spending and become more efficient with their capital, these companies can make much better returns at current prices than what they made when oil was priced at $100 per barrel,” Nelson said.
Nelson believes oil is currently priced at a level that provides a balance between the US shale oil production and the crude oil production by the members from the Organization of the Petroleum Exporting Countries (Opec).
He foresees that oil price will stay in the range of $50-70 per barrel, but risks remain. “Ultimately, Opec can change the market quite substantially,” he said. “Don’t forget that Opec has recently cut its production,” he said.
He added that until Saudi Arabia figures out the arrangement for a mega-IPO of its state-owned oil exporter Saudi Aramco, the price may stagnate at the current price.
However, oil price may be impacted by financial speculations. “We must accept that fundamental analysis of oil prices can be disrupted by non-fundamental factors. For instance, financial speculators can have a big effect for the market,” he said.
“Global traders broadly hold long positions in oil now. But if they went the other way, like when financial players sold oil in August last year, the price may fall substantially,” he noted.
Overall, he finds a value opportunity in the material and energy sectors, in which investors are still quite cautious because “their memory of a five-year bear market is still quite fresh.”
Outlook on metals
Nelson remains positive on precious metals: gold, silver and palladium.
Gold is likely to rally if the inflation rises and the weakness in US dollar extends, he said. He added that volatility in the investment markets will also lift gold price. “If there is a repeat of market volatility in early February, or something goes a bit further, then gold would do relatively well,” he said.
US president Donald Trump has announced the imposition of tariffs on steel and aluminium, while potentially exempting Canada and Mexico, the largest exporters to US.
Nelson expects the tariffs are unlikely to have a major effect on metal prices in the rest of the world unless a trade war impacting global economic growth develops.
“At the moment this is just a risk or an uncertainty on a horizon,” he said. “It comes back to his negotiating style – he is a dealmaker in the corporate world where he starts with a big threat and tries to threaten people away. We have seen tariffs on steel imports before. The former US president George W Bush did this and eventually abandoned it. It did not really make much difference then.”
Performance of the Investec Global Natural Resources Fund versus the category average
