From Oil to Sunlight, Natural Resources Offer Opportunities

Natural resources could present a real investment opportunity in coming years as a combination of factors allow some companies to reap the benefits of rising prices.

Many natural resources are fundamental inputs into the global economy. Over the course of the past decade, markets for many resources have shifted from oversupplied to undersupplied—even as global demand has risen. The disconnect creates a chance for investors to profit from public companies that produce key resources linked to energy and food security, global trade, electrification and defense.

Think oil, natural gas, copper, iron, sunlight, soybeans, air, soil and water.

To understand the opportunity, look back at the overinvestment period that began in 2002 when China’s continuing economic boom was fueled by infrastructure construction and real estate development—both of which are natural resource intensive. Companies invested heavily, particularly in oil and copper, to boost supply and meet China’s demand. This investment amounted to a capital-expenditure boom that continued through the Great Recession. Commodity prices eventually crumbled after copper peaked in 2011 and oil went over the cliff in 2014. This kicked off a period of underinvestment that has continued through the pandemic. Even today—after nearly a decade of constrained supply growth—capital spending is insufficient to meet the rising demand for key natural resources.

The impact on publicly traded stocks tied to natural resources has been dramatically positive. For the past 10 years, companies have engaged in massive cost cutting, debt reduction and consolidation. In many cases, corporate boards have adopted strategies forcing executives to follow balanced and disciplined capital-allocation programs. The latter forces companies to balance capital spending on production with dividends and share-repurchase programs while maintaining conservative balance-sheet leverage.

The future for natural resource investors is bright. Strong, disciplined companies are well positioned to capitalize on a modern world that needs the resources they produce.

AMG’s opinions are subject to change without notice, and this report may not be updated to reflect changes in opinion. Forecasts, estimates, and certain other information contained herein are based on proprietary research and should not be considered investment advice or a recommendation to buy, sell or hold any particular security, strategy, or investment product.