The ongoing rhetoric on trade wars has been impossible to avoid in recent months. The noise surrounding the geopolitical struggles has impacted many sectors and asset classes and investors are unsure of what to believe.
But for Mike Dragosits, Associate Portfolio Manager at Harvest Portfolios, the impact on investor sentiment is more pronounced than the actual market risks, particularly in commodities.
“Commodities have been a hot topic in the news, but, in terms of the outlook, we are still positive on a lot of the global macroeconomic indicators,” says Dragosits. “Manufacturing PMIs are still in positive territory, supply is still very tight and valuations are extremely attractive. We’re also in a period of rising rates, which generally coincides with a positive environment for commodities.”
The forward multiples of many commodities firms are quite attractive, especially when compared to those of global stock market indexes. In addition, companies are now are returning elevated free cash flows back to investors in the form of dividends or stock buy backs, as opposed to previous cycles when they were pumping it back into the ground to generate additional production.
Dragosits is a manager on the Harvest Global Resource Leaders ETF, which was designed to capture the opportunities in global commodity resources. The fund currently holds 30 names; global producers and refiners of industrial metals, steels, chemicals and other materials.
“Our over-riding philosophy is to develop funds in the areas where Canadians are under-represented, and commodities are a great example of this,” Dragosits says. “Canadians are familiar with resources but we have designed this ETF to really focus in on the true global names outside of Canada. We have a couple of Canadian names in the fund but we really have designed it to be predominantly invested in big, global resource names, outside of the energy and precious metals names that dominate in Canada.”
The fund is also taking advantage of the current trend and increasing consumer demand for electric vehicles and subsequent battery metals demand. It’s a trend that Dragosits sees as being a long-term driver of growth in the lithium, cobalt and nickel markets, and a significant proportion of the ETF’s portfolio is dedicated to capturing that growth. Much of the expansion in electric vehicles’ popularity can be directly linked to the adoption of regulations that aim to cut carbon emissions in many countries across the globe, Dragosits explains.
“The technology and range improvement of batteries has made electric vehicles more attractive from a consumer standpoint, and the cost to produce them has narrowed compared with the internal combustion engine,” he says.
“Also, Tesla has really made electric vehicles cool again and other companies are now jumping on the bandwagon. Harley Davidson, for example, has announced it will launch the electric motorbike in 2019. It’s a particular area of the commodities space that we think is positioned for strong long-term growth.”