Making sense of the markets this week: November 28

The greenification commodities supercycle 

While there may be a broader commodities supercycle underway, what appears to be more of a sure thing is the green commodities supercycle. To reach our global net-zero CO2 targets by 2050, and the interim targets for 2030, nations around the world will have to produce a spectacular number of electric vehicles and produce clean energy at a prodigious rate. 

It will take an incredible amount of materials (commodities) to build those vehicles and batteries, and to create the amount of clean energy required to meet those goals. 

Setting the table for the greenification of the commodities supercycle is this article in the Financial Post. by David Rosenberg, who created an index to track these commodities: 

“On the metals/mining front, the World Bank estimates more than 3 billion tons of metals and minerals will be needed for renewable energy infrastructure by 2050 in order to achieve the goals from the Paris Agreement. We include copper, graphite, nickel, lithium and cobalt, since all are essential in the electrification process, the transition from internal combustion engines to electric vehicles, and the building of energy storage technologies—a requirement in the widespread adoption of renewable sources as energy demand and energy supply do not match as easily compared to fossil fuel sources.”

Within that post Rosenberg frames the amount of additional commodities that will be required, citing an International Monetary Fund report. The need for lithium and cobalt are expected to rise by a factor of six; copper demand will increase twofold; the nickel requirements will increase by four times. Much more silver will also be required, but not to the same degree as the aforementioned list. 

Most of that increase will occur before 2030, as we do need to get a move on to save the planet for future generations. 

The Guardian quotes Mark Lewis, chief sustainability strategist at BNP Paribas Asset Management:

“The next three decades are ‘likely to bring a supercycle in investments in clean energy infrastructure, clean transportation and everything else that is required to make the green transition possible.’ ”

The green investment trend is obvious, and it’s right in front of us. Regular readers of “Making sense of the markets” will know that I like the potential of those undeniable investment trends. It should also be noted there is no sure thing, but I do like the calculated risk here. And certainly, I should offer the obvious: The planet is more important than our investment portfolios. 

Many investors will use baskets of commodities as an asset class and part of the portfolio. Commodities are known to be the most reliable and most effective inflation hedge. But the world does change, and we might tilt our portfolio toward future-based trends. That ability to tilt to the future exists in the commodities space. 

I hold a materials ETF, plus the Purpose Diversified Real Asset Fund and a U.S. dollar commodities ETF. I hold commodities, but those funds would offer more broad-based exposure. And I do get some green commodities exposure by way of the BATT ETF, whichplays the electric vehicle and battery ecosystem. 

I am certainly looking to shade in some greenification commodities exposure. Unfortunately, there is no ETF for that yet. 

There is a Canadian ETF that gives exposure to global lithium producers that looks like a very good option: HLIT from Horizons. The fund has impressive gains out of the gate. It was launched in June 2021. 

An investor would then have to build their own basket of cobalt stocks, copper stocks, nickel stocks, silver stocks and others. 

For research candidates, you might look to this list of copper stocks and this list for nickel. 

You may find enough of what you’re looking for in a diversified base metals ETF. Here’s an equal-weight ETF offering from BMO. 

If you do find a more environmental-focused commodities fund, please drop a note in the comment section. 

And one last kick at the oil can 

Mark Lewis, the chief sustainability strategist at BNP Paribas Asset Management, previously mentioned in that Guardian article, offered this interesting perspective in The Guardian, with respect to traditional energy: 

“However, higher fossil fuel prices could also tempt major oil and gas companies to invest in lucrative new projects by inflating the profits of existing portfolios in “one last party” for fossil fuels, he warned.”

That is a wonderful segue to our next topic. 

The risks of investing in the Canadian oil stock party

I’ve written that I’m a fan of investing in Canadian oil and gas stocks before. The investment rationale made a lot of sense (to me) over a year ago, and I’m still buying the argument and the energy stocks. 

The Canadian oil and gas sector is coming out of a bear market that lasted for several years. And now, over the last year, energy is the best-performing sector. Many might now be drawn to the sector, based on the returns and the momentum. But investors should consider the bull and bear thesis before investing. 

The risks are real and considerable. 

There’s political risk. Oil and gas is on the wrong side of global sentiment and government policy as we strive to reach net zero emissions by 2050. 

Here was an interesting poll I offered on Twitter:

There might be an attempt to tax these companies out of business. Or at least, increasing tax rates could confiscate much of the profits, putting great pressure on stock prices and dividends. Governments will redirect those tax revenues to green energy projects. 

That is the general idea behind putting a price on carbon. 

Also, the investments necessary for traditional energy companies to shift to greener energy solutions, or employ carbon capture, could be more than sizable. The investments necessary in these green ventures will divert free cash flow away from dividends and share buybacks. They become less profitable. 

The Organization of Petroleum Exporting Nations (OPEC) could increase production and drive down oil prices. That was the source of the risk that created or contributed to the energy bear market that began in 2014. 

Canada’s oil producers are in competition with the shale oil and gas industry in the U.S. If they ramp up production south of the border, they need less Canadian oil. 

We can experience demand destruction due to the economic risk. We saw oil demand fall to a great degree during the early stages of the pandemic. The virus is always the wild card. 

(And after writing this column, as if right on cue for Friday morning, I read of Nu, a new variant of great concern. The fear of economic risk began to spread. Stocks are set to open much lower, gold is up, bonds are up, and the price of oil is down by over 12%. U.S. stocks were operating on a half-day due to Thanksgiving in the U.S. And the U.S. market (IVV) closed down 2.3%, Canadian stocks (XIC) were down by about 2.5% mid-day. International stocks (XEF) are also down by over 2%. The Canadian energy index (XEG) was down by 6%. The world and the markets will be watching Nu over the next few days and weeks.)

The economy moves in cycles, so it’s only natural that there will be periods of economic decline. We should always remember that oil and gas and other commodities are cyclical—there can be wild swings along the way. 

The counterpoint:

Eric Nuttall, the manager of the Ninepoint Energy ETF I linked to above, recently addressed many of these risks in a recent article in the Financial Post. Have a read, it’s an interesting argument that in effect, has an answer for those risks. Here’s an excerpt:

“We remain in a multi-year bull market which will lead to all-time high oil prices. With energy stock valuations becoming even more compelling after the recent selloff, trading at average free cash flow yields of 25% at US$70 for [West Texas Intermediate] WTI, I have been adding to beaten up names.”

You should do additional research as well. 

I will continue to add to my energy ETFs. Given the risks, I will keep my exposure below 10%. Just as with investing in bitcoin, I will rebalance along the way. 

The oil and gas stocks are part of our commodities baskets (referring to mine and my wife’s accounts) and are part of building an all-weather portfolio.

The re-appointment of Jerome Powell to Fed Chair

This week, we saw the potential reappointment of Jerome Powell as Chairman of the Federal Reserve. President Joe Biden announced last Monday that he is renominating Jerome Powell for a second term and will put forth Fed Governor Lael Brainard as vice chairman.

The nomination will head to the Senate for confirmation. 

The market likes the consistency and the leadership that was very accommodative during the pandemic. The Federal Reserve recently offered that rates might be rising sooner rather than later, but perhaps the markets trust Powell to not push things too far. 

As I wrote in late September, Powell might be the guy to land this plane, thanks to his soft-speak mastery, in terms of how he delivers news about the markets. I called it “hawkish extra light.” (“Hawkish policy or tone tends to focus on controlling inflation as a primary goal of monetary policy,” I wrote.) As much as decisions on interest rate movements are important, so is the messaging from The Fed. The right tone and language can calm markets. 

In June 2021, I wrote about the taper tantrum, asking will the stock markets allow central banks to raise rates in 2022? Inflation and monetary policy have been dominant themes in 2021. The year 2022 will deliver the answer on transitory inflation vs. the inflationistas, and if we can increase and normalize rates and borrowing costs without spooking the markets. 

As November is drawing to a close, stock markets are trying to eke out some modest gains for the month. At the end of October, I wrote that November and December are historically strong months for the markets. 

I’m keeping score and I will report back in January 2022. 

Is it the end of the work-from-home party for Zoom? 

This week, we saw a continued sell-off in many of the work-from-home stocks. Seeking Alpha reports: These are types of stocks—including Snowflake, CrowdStrike, ServiceNow, Atlassian, HubSpot and Asana—that might benefit from workers conducting their meetings at home via video conferencing.

“Many of those companies are involved in the types of software used to manage services and applications used by remote workers. As some larger companies have begun implementing plans to have workers return to the office in the coming months, concerns have arisen over growth opportunities for their services if there is a significant drop in employees working from home.”  

It was Zoom Video Communications (ZM) that set off the march out of those stocks (starting the stock sell-off). On Tuesday the stock price fell by over 16% after their third-quarter earnings release. 

Zoom is also down by more than 50% from its highs from October 2020. 

As employees are being called back to the office, growth has slowed. It is a safe bet that the future will be hybrid with respect to work-from-home and heading into the office, but that balance is up for debate. And the balance for that hybrid future will affect their earnings results. 

From the same Seeking Alpha post, Zoom was also joined on the selloff call by:

“Snowflake (SNOW), CrowdStrike Holdings (CRWD) and ServiceNow (NOW) were among the software stocks caught up in a broad selloff, Tuesday, as several companies in the cloud and data analysis sectors retreated in the wake of big losses from Zoom Video Communications (ZM). ServiceNow (NOW) was off by 3.3%, Atlassian (TEAM) shares shed 4.5%, HubSpot (HUBS) pulled back by 4% and Asana (ASAN) fell by 4.6%.”

I previously looked at the winners and losers in the hybrid future. The continuation of a partial work-from-home economy might contribute to the hollowing out of downtown cores and a reshaping of the real estate sector as well. 

This is another interesting theme that I’ve been covering in this column. I will get many more answers in 2022 as we all move to the other side of the pandemic. 

These days, though, it’s not working out so well for Zoom investors. 
Dale Roberts is a proponent of low-fee investing and he blogs at cutthecrapinvesting.com. Find him on Twitter @67Dodge.

About Dale Roberts

Dale Roberts is a former investment advisor and proponent of low-fee investing. He created the Cut The Crap Investing blog in 2018. Find him on Twitter for market updates and commentary, every day.

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