Global resources equity investing is in the midst of a fast-paced and profound change.
The transition from the super to a normal commodity cycle has presented a host of challenges for many resources companies, perhaps felt most acutely by upstream producers.
But to focus attention only in this area would be to miss a much bigger picture.
As investors survey the resources equity markets, it is clear that an evolution is taking place. The fall in commodity prices since the highs of the boom period has been dramatic, while the reaction in the equity markets has also been severe.
There is a wealth of opportunities as the industry returns to a normal cycle – a new breed of next-generation companies are driving technological change, catering to emergent consumer trends, and helping to broaden and enrich the investable resources equities universe.
The key driver of performance over the next 10 years will be identifying and investing in firms that have exposure to this structural, not cyclical growth. There are many opportunities emerging in niche areas such as battery storage, sustainable solutions, health and well-being and metal replacement.
However, an evolution in industry does not necessarily equate to obsolescence for all that is established.
There are selective opportunities in the more traditional resources equity sector. In particular, it is encouraging to see upstream producers enact growth-enhancing reforms that should act as a catalyst for renewal in the changing environment.
Upstream commodity companies exhibit greater sensitivity to global growth and cyclical price swings.
When sentiment is downbeat the wider market rarely distinguishes between the prospects for physical commodity markets and upstream producers. But flawed reasoning such as this can lead to overlooked opportunities.
Cycles evolve, but commodities remain structurally important. Crude oil, natural gas, iron ore, copper, timber and livestock, to name but a few, are essential raw materials that support the everyday economy and this is unlikely to change in the short to medium term.
These firms are one step closer to the consumer and add value as refiners and processors of commodities into a diverse range of end products and services, such as processed foods, paint, petrol and packaging.
Growth opportunities within this group are global, being driven by consumer demand in both emerging and developed markets.
The long-term prospects for resources investing are bright. There are many world-leading firms with the pricing and market power to sustain healthy earnings in both developed and emerging markets.
In emerging markets alone, the long-term requirements for industrialisation and urbanisation will create demand for processed materials, while greater affluence will lead to an evolution in local tastes, product preferences and diets.
Next-generation companies offer long-term growth from changing consumer trends and new technology. For example, greater awareness of the environment and associated new technologies such as alternative energy or battery storage is one such trend.
