Energy and resource blues
Last week's Investment Matters considered the outperformance of the the listed Property sector, as compared to the overall market. Briefly, from the GFC low on 6-Mar-09 to close of trading on 15-Jun-16, the Property accumulation index (i.e. including dividends / distributions) has increased 20.2% per annum, compared to the ASX200 accumulation index increase of 11.8% p.a.
By definition, where out-performers exist, so do under-performers.
The key under-performers since the GFC low of March 2009 have, unsurprisingly, been the Materials (often termed Resources) and Energy sectors. Although the extent may be a little of a surprise. Since the GFC low on 6-Mar-09, the Energy accumulation index has returned minus 2.5% p.a. The Materials accumulation index has returned plus 2.6% p.a., but is still in a capital loss position.
The listed Energy sector comprises companies involved in the exploration and development of coal, uranium, oil & gas and renewable energy assets. Stocks include Woodside Petroleum, Oil Search, Santos and Caltex.
The listed Materials sector comprises a wide range of commodity-related manufacturing industries. Included in this sector are companies that manufacture chemicals, construction materials, glass, paper, forest products and related packaging products, and metals, minerals and mining companies, including producers of steel. Stocks include BHP, CSR, Rio, Amcor and Newcrest.
Because of the significant weight of resource companies e.g. BHP, Rio, Newcrest, in the Materials Index, it is often termed the Resources sector)
The following graph depicts the performance of the Materials and Energy sectors (and property has been left on for contrast).
Our investment response
So beaten up = good investment opportunity, right? Not always. Certainly it means that it is a pool in which we are more likely to find opportunities - as compared to listed Property. However, circumstances are somewhat different than pre-GFC, for instance commodity prices and the outlook thereof.
However, as with all our investment prospects, looking at each company as an individual opportunity is crucial. We do have some Energy and Materials (Resources) exposures currently, directly through BHP Billiton, South32, and Origin Energy, and indirectly through Heemskirk, Emeco, and a small amount through Cardno's (now down-scaled) energy division. Direct exposures comprise ~9.3% of your portfolio weight, and indirect (including Cardno) are ~5.6%.
Although we actively monitor for new opportunities in the resources and energy space, we are cautious - given we do not like making investment decisions based on forming a view on price outlook / supply and demand dynamic for oil and the various resources.
We are comfortable, for instance, investing in BHP Billiton at the current time and share price, given it has world-class, and generally lowest quartile production cost operations.