For much of the past half century, globalization has been a tailwind for companies and investments with a worldwide footprint. Globalization was all about outsourcing manufacturing to lower cost countries. China was a huge beneficiary of this macro trend. This tailwind, however, started to shift with the onset of COVID-19, as supply chain disruptions became a challenge for global economies. National security concerns also drove countries to make critical products on their home soil. This trend towards de-globalization and bringing manufacturing in-house will be a major theme going forward.

Another major theme that has taken hold in recent years is decarbonization, which has to do with the gradual evolution of the energy landscape and the transition to renewable sources of energy. The combination of de-globalization and decarbonization—or, as some refer to it, “greenflation”—along with the ultra-loose monetary policies of global central banks since the GFC (Great Financial Crisis), should result in a higher inflationary regime going forward. This environment could potentially be an advantage for commodities and natural resource companies that directly benefit from these inflationary macro trends.

Looking forward, there are several reasons to subscribe to the above thesis:

1)     Emphasis on Reversing Climate Change – Countries and companies are setting progressively more ambitious climate goals, which will support substantial investments into sectors driving resource transition. Over 70 countries have pledged net zero greenhouse gas (GHG) targets, including the U.S., Europe and China, which together account for more than 75% of global emissions. In the private sector, over a third of the world’s largest companies have a set goal to reach net zero by 2050.

2)     Government Funding – Incentives provided by the governments in both the U.S. and Europe will act as catalysts for this transition. In the U.S., for example, the funding provided by the Inflation Reduction Act (IRA) is a crucial catalyst that will accelerate the development of the resource transition sector. This act, passed in August 2022, will provide close to $400 billion in tax credits and infrastructure funding in the next decade. This will enhance the economic viability and lead to more investment opportunities across the resource transition ecosystem.

3)     Made in America – Already the largest traditional energy producer in the world, the U.S. is poised to become a global leader in the clean energy sector as well. The funding provided by the IRA will unlock opportunities for the U.S. to become an exporter of clean energy technology and infrastructure.

4)     Low Level of CapEx Spending – Capital expenditures (CapEx) for growing capacity in the traditional energy sector have been constrained, as companies have been fiscally disciplined and focused more on returning capital to shareholders. This has led to CapEx levels in commodity production to be at a 15-year low. This underinvestment in recent years will impact production for at least the next decade given long project lead times, thereby adding to inflationary pressures.

5)    Supply Chain Risks – Supply chains for materials involved in the resource transition face numerous risks, including volume shortages, price volatility and geographical sourcing dependency. Supply chain risks underscore the importance of having a diversified natural resources portfolio while the resource transition powers forward.

In our view, investing in the natural resources sector could potentially be very rewarding, but it is not without risk, such as the potential for high concentration in a single sector. However, we believe that one way to help minimize this risk is by employing an active management style partnered with an extensive team consisting of geologists, engineers and analysts with deep sector experience. Strategies that employ an active management structure generally have more flexibility to adapt quickly to emerging trends, and teams that have a highly technical understanding of the mechanics within each sector can help active managers make more informed investment decisions. This creates a system where investment decisions are rooted in both economic and sector-specific insight and consider the relative intricacies of multiple disciplines at the same time.

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Ifyou enjoyed reading this article, check out other featured blog posts withSasan:

The Financial Commute – Ep. 25 Your Gas Bill & the Movement Towards Energy Alternatives

The Financial Commute – Ep. 3 Does Global Exposure Make Sense?

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DISCLOSURES:

This information is presented for educational purposes only and is not intended to constitute financial, tax, or legal advice. Morton Capital Management dba Morton Wealth (“Morton”) makes no representation that the strategies described are suitable or appropriate for any person. You should consult with your financial, tax and legal advisors to thoroughly review all information and consider all ramifications before implementing any transactions and/or strategies concerning your finances.

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