Looking to 2020 and the ’20s – December 20, 2019

Looking to 2020 and the ’20s – December 20, 2019
Morgan Lewis Posted on December 21, 2019

Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

Looking to 2020 and the ’20s

We tend to think that a turn of the calendar, even into a new decade, is generally in and of itself not a thesis-changing event. That said, as we move into this holiday season and into the close of a year and a decade, we cannot help but reflect on the current market environment, our expectations for the coming year, and what that means for capital allocation for the MAPS strategies.

Gold and gold stocks have had a pullback as of late. However, they have put in impressive year-to-date performance on the back of low nominal and real yields globally, worldwide monetary easing, and healthy investment and central bank demand. Year to date, gold is up 14.9 percent and the HUI NYSE Arca Exchange Gold BUGS Index is up 40.1 percent on a total return basis. Looking ahead to the coming year, we believe that a consolidating gold price due to the pause in rate cuts domestically coupled with M&A activity in the sector will be a moderate positive for this space in the coming year.

REITs have had a banner year, and have in fact largely kept up with the broader market for the entire decade. The collapse in global yields has sent investors running for just about anything with a stable income profile. Thus far, the Dow Jones Equity REIT Total Return Index is up a whopping 27.1 percent in 2019. M&A activity was considerable, although at five-year lows in terms of total deal value. Given capitalization rates that are at or approaching historic lows, we have a difficult time seeing 2020 as a repeat performance of 2019. However, we believe that there are structural tailwinds for many real estate subcategories. Although we are “late cycle,” this in and of itself is not a growth killer. Net operating income growth remains inflation-like in nature for many categories. Additionally, there is plenty of capital availability. Until these dynamics shift, we see opportunities to put capital to work. We think returns in this space continue to be very much sector dependent.

Natural Resources is a complex discussion with many crosscurrents. The SPDR S&P Global Natural Resources ETF is up 15.2 percent on a total return basis for the year 2019, but performance has been quite bifurcated. In general, while diversified multinational energy companies treaded water from a performance perspective, both E&P and oil services stocks struggled mightily in 2019. The SPDR S&P Oil and Gas Exploration and Production ETF is down 11 percent, and the iShares U.S. Oil Equipment and Services ETF index is down 2.6 percent for the year. This is despite crude being up 33 percent for the year thus far. In fact, these stocks have underperformed for an entire decade.

Effectively, the US shale industry has been a victim of its own success, and technological innovation drove production growth and gave the oil market a tremendous source of new supply. As a result, the industry failed to deliver returns that were above their cost of capital, and the sector was de-rated. Going forward, we believe that shale companies, largely due to shareholder pressures, have gotten religion around a returns focus versus one on growth. As a result of this change, and discipline on the part of OPEC, we are constructive on this beat-up sector coming into 2020 – assuming the global economy does not fall off a cliff. Although we acknowledge that this is somewhat of a consensus view, we are also constructive on copper in 2020-2021 as there is a dearth of new discoveries and low inventories. According to Wood Mackenzie, copper production peaked in 2019. It will roll over in the coming years, and the supply deficit will widen. EV-driven demand will add to this deficit.

Turning to infrastructure, 2019 has also been a bifurcated year. So far, the iShares Global Infrastructure ETF is up 26 percent on a total return basis, but it is very much a mixed bag. Energy infrastructure put in pretty dismal performance on a relative basis, as the Alerian MLP index is down 2.3 percent for the year so far. These stable income stocks were thrown out with the dismal performance in energy, and we see some very good opportunities in this space. On the other hand, the Dow Jones Utility Index is up 27 percent. Utilities are a difficult place to put capital to work, as we feel in large part that the valuations are quite full and top-line growth will be below that of GDP. As always, there are exceptions to this rule, and we look to a new investment cycle as the industry slowly transitions toward renewables. One of the most valuable resources is water, and we will continue to look for ways to invest in this theme.

We thank you very much for your support, and we wish you and your families a very happy holiday season.

Best Regards,

David McAlvany
Chief Executive Officer

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