Market overview
The resources sector has been a marked outperformer, both recently and over the past three years. Year to date the FTSE/JSE Resources Index returned 21% against a 3.8% drop in the FTSE/JSE All Share Index. Over three years resources returned 15.7% per annum with the broader market only yielding 6.7%. The standout performers over this period were the general miners with Sasol and the paper stocks also performing well. By contrast, precious metals lagged significantly.

While commodity price movements and currency impacts have driven these moves to a large extent, self-help initiatives over this period have restored some confidence in the global diversified miners. They now enjoy strong balance sheets having controlled capital spend and delivered. While we would normally expect miners to embark on projects and acquisitions in this sort of environment, capital discipline and improving returns to shareholders has been the core feature of the current cycle. The dearth of new projects across a broad range of commodities has resulted in supply and demand fundamentals that should remain supportive of the sector.

Despite the outperformance of the sector, valuations remain attractive. This is largely driven by an expectation of a rollover in commodity prices and caution in the market regarding previous value-destructive capital allocation by the miners.

The trade war between the US and China has had a dichotomous impact on commodities. Exchange traded commodities such as copper have come under pressure as a way to play a slowdown in trade. Bulk commodities have, however, remained well supported due to expectations of stimulus-driven fixed-asset investment in China. Another significant driver of bulk commodities has been sustained environmental controls, which has reduced local Chinese supply of key commodities and increased demand for higher quality products in the seaborne market.

We remain optimistic that Chinese stimulus and environmental controls, the medium-term supply and demand outlook and continued strong developed market growth will be supportive of commodities and hence the miners and will positively surprise the market. Combined with strong free cash flow generation and attractive multiples we expect the resources sector to continue to outperform the broader JSE.

Fund commentary

The fund outperformed the peer group and the index over the quarter while over the past year performance has been largely in line with the peer group and the index.

In terms of our core positions, we retain our preference for Anglo American among the large diversified miners as we believe that its cash flow generation and unique commodity suite is undervalued by the market owing to its South African exposure and poor strategic messaging over the past three years. As the group continues to deliver operational and financial results ahead of expectations we anticipate a rerating. We also retain a preference for the larger, global diversified miners as opposed to the more leveraged SA miners.

Sasol has rerated as the Rand has weakened and oil prices have risen. We remain constructive on the stock as it transitions from high capital spend at its US cracker project to ramping-up the project and delivering operating cash flows.

In the precious metals space Impala Platinum is our preferred exposure as we believe it has a compelling operational turnaround story that could deliver significant returns, despite the prevailing platinum group metal prices.

Conclusion

Looking forward, the evolution of the global trade dynamic and its impact on global growth will be a key focus area. However, trade will have to be looked at in the context of the supply-driven bull case for commodities that could see key markets remain tight if demand holds at reasonable levels.

In the South African context, we acknowledge the positive newsflow and rhetoric regarding regulatory reform and look towards those companies with the ability to invest and grow their businesses in the medium-term, provided there is certainty in regulations and security of tenure.