Events | February 07, 2022

Valuation Disconnect

Opportunities in Resource Equities

Overview

Equity and fixed income markets continue to look expensive, and expected returns are generally low. In contrast, resource equities are historically cheap and offer much higher potential returns. In addition to attractive returns, resource equities offer investors diversification, inflation protection, a margin of safety, inefficiencies, and optionality.

In this webcast, Lucas White, lead portfolio manager of the GMO Resources Strategy, discussed these opportunities.

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Key Points

  • The strategic case for resource equities is extremely compelling, offering investors the potential for excess returns, diversification, and inflation protection.
  • Tactically, commodity producers are the cheapest they’ve been in the last 100 years on some measures, even as inflation has ticked up to 7% by the end of 2021.
  • There’s a strong bull case for commodities today, but you don’t have to believe commodity prices are going to rise to make a solid case for owning resource equities. At current commodity prices, resource companies should generate extraordinary returns going forward.
  • The energy transition is creating exciting opportunities for resource equities in the materials that drive clean energy solutions, such as copper, lithium, and nickel. Meanwhile, fossil fuels will be around for many years to come.
  • We have a unique strategy that is well positioned to capitalize on these opportunities and has outperformed its benchmark by 750 bps, annualized, since its inception 10 years ago (net of fees). The portfolio’s holdings trade at historic discounts to the overall market, presenting investors with tremendous opportunities.

A One in a Hundred Year Opportunity?

Valuation of energy/metals companies relative to the S&P 500

As of 12/31/2021 | Source: S&P, MSCI, Moody’s, GMO
Valuation metric is a combination of P/E (Normalized Historical Earnings), Price-to-Book Value, and Dividend Yield.

 

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Performance data quoted represents past performance and is not predictive of future performance. Net returns are presented after the deduction of a model advisory fee and incentive fee if applicable. These returns include transaction costs, commissions and withholding taxes on foreign income and capital gains and include the reinvestment of dividends and other income, as applicable. Fees paid by accounts within the composite may be higher or lower than the model fees used. A Global Investment Performance Standards (GIPS®) Composite Report is available on GMO.com by clicking the GIPS® Composite Report link in the documents section of the strategy page. GIPS® is a registered trademark owned by CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein. Actual fees are disclosed in Part 2 of GMO's Form ADV and are also available in each strategy’s Composite Report.
Disclaimer: The views expressed are the views of Lucas White through the period ending February 3, 2022, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.
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