The chart below shows the year-to-date NAV performance (in Euros) of the db x-trackers DJ Stoxx 600 Basic Resources ETF, rebased to 100 on 31 December last year.
In fact, from the low point reached on 3 March this year, the fund’s NAV has risen 124%.
Basic resources has been the best-performing of all 19 DJ Stoxx 600 supersectors in 2009, returning almost 30% more in dollar terms than the next best (banks). According to the latest Barclays Global Investors DJ Stoxx 600 ETF Net Flows report, released earlier today, the sector has also attracted the largest year-to-date net inflows to related ETFs (nearly US$500 million). The report lists Lyxor and Source as the largest recipients of fund flows, with their basic resources sector ETFs pulling in US$275 million and US$254 million of new cash, respectively. Source only launched its “optimised” sector ETFs in July this year, so it is the most impressive performer on the asset-gathering front.
Investors have of course been attracted to the mining and exploration companies in the sector as a result of the resurgence of commodity prices this year and the related rebound in emerging markets.
The performance of the companies in the index is all the more impressive when one considers that four of the five largest – Rio Tinto, Anglo American, Arcelor Mittal and Xstrata (BHP Billiton being the only exception) – have either reduced or scrapped their dividends this year. The five companies make up 75% of the index in the capitalisation-weighted index version that all but one of the sector ETFs track, and a slightly smaller 70% in the version that Source uses.
Investors are clearly looking beyond the troubles of 2008/09 and anticipating a better few years ahead, with Chinese commodity demand a key supporting theme.
Nevertheless, not everyone believes this investor optimism is well placed. In a thought-provoking monthly newsletter, Hugh Hendry of hedge fund Eclectica paints an alarming picture of overcapacity in the world’s steel and aluminium industry (the Eclectica November commentary is available at Seeking Alpha). He argues that China’s “mad dash for commodities” is fundamentally misjudged and reflects a naive belief in the resumption of large nominal GDP growth rates worldwide, whereas a period of almost static GDP in money terms is quite likely in those countries (such as the US) where there’s a huge debt overhang.
Hendry quotes William White, former chief economist at the BIS, as saying: “Many countries that relied heavily on exports as a growth strategy are now geared up to provide goods and services to heavily indebted countries that no longer have the will or the means to buy them.”
Hendry says that he is expressing his market views largely through options strategies that will benefit from official interest rates staying lower for longer and through cheap sovereign and corporate default protection (though in Japan he’s buying protection against selected corporate default rather than that of the sovereign government, a rather crowded trade in recent weeks).
But if Hendry were confined to trading ETFs, I suspect that he would be switching from the long to the inverse versions of the basic resources funds or selling them short!