Our macro investment outlook for 2023
Published 16-JAN-2023 09:35 A.M.
15 minute read
Good start to 2023 so far.
We are Invested in a portfolio of small cap stocks across a number of macro themes we believe will perform well.
Today we share what we predict could happen in each of those themes in 2023.
At the end of 2023 we will grade and share how accurate our predictions were - in the meantime our portfolio performance will likely provide a running indicator of how good our predictions are.
There was plenty of doom and gloom in the media during 2022 about war, rising interest rates, the end of “free money”, a coming recession and the China slowdown.
Like it or not, a lot of people tune in to the mainstream media - so many will have been scared into selling and are likely to be sitting on cash waiting for sentiment to improve.
We think most of the fear has already been priced in and 2023 will actually be a decent year in some sections of the market, and a few carefully selected small cap stocks.
Our general strategy is not to sell when markets are awful (for example, we held everything during the extreme March 2020 COVID crash). We Invest in carefully selected companies we believe in over the long term - so selling during cycles of market weakness doesn’t make sense.
We are only two weeks into 2023 and the small cap market is off to a hot start — most of the companies on our small cap watchlist are up in the first few weeks of January.
Recently it feels like the worry from rising interest rates is fully priced into the market, China’s sudden reopening from COVID has taken everyone by surprise, and a few big deals in the commodities space are encouraging investors to come back.
So after a rough 2022 where small cap stocks took a beating and are now coming off a low base, a bit of positive sentiment has seen a few early risk takers dip their toes back into the markets this week, likely hoping to pick the bottom.
We believe there is still a significant amount of cash that was pulled out of the markets during 2022 waiting for the right time to come back in.
We think it will be another great year for battery materials, and energy should have another good year as part of a broader commodities supercycle that is playing out after a decade of underinvestment.
We believe we are only a couple of years into a commodities super-cycle, which will continue to play out this year.
One new theme we are focusing on in 2023 is “development stage” resource companies — those with a proven resource and economic studies that are now at the financing stage of building a mine.
Gold was hated for the last two years and we think it will have a significant rebound in 2023, holding (and increasing) all our gold positions during the last two years of pain will hopefully pay off.
We are expecting a similar rebound in recently unloved cannabis stocks.
Tech is out of favour after the NASDAQ’s great tech wreck of 2022, and while there may be some pain still to come, we think there are some bargains out there for patient investors like us.
Biotechs have also been out of favour the last two years, but with a likely return to M&A activity for the sector, we think that there could be some sidelined VC money deployed this year at the first sign of a market turnaround.
Most importantly, we think 2023 will be a “stock pickers” market.
Gone are the heady days of the “free money” bull market of 2020 and 2021, where you could invest in almost any stock and expect it to go up.
We think a smaller number of higher quality companies are going to deliver the most returns in 2023 — our aim is to continue to carefully select the companies we Invest in and give them time to deliver.
So in short, we think a lot of the fear and bad news from 2022 is already priced into the market, money is sitting on the sidelines and if a global recession doesn’t happen OR is softer than expected, 2023 should actually be a good year for some of our chosen Investments that manage to deliver on their plan.
Here are all the themes we are Invested in, today and next weekend we will provide our outlook for 2023 on each one:
- Commodities super cycle
- Energy transition materials
- Rare Earths
- Renewables (solar, wind, geothermal, hydro)
- Energy transition materials based in the US
- Development stage resource companies
- Oil & Gas
- Gold (and silver)
- Iron ore
- Food security
- Growth stocks
Today and next weekend we will share:
- What we like about each theme for this year
- What other analysts say about the macro theme
- Present the bear case against, or what could actually go wrong
Here is part one of our “Outlooks for 2023” series:
We think the fifth commodities super cycle has started.
The history of commodities supercycles is as follows:
- US industrialisation: Late 1890s through to a peak in 1917 - the US was rapidly industrialising and the supercycle peak coincided with the entry of the US into World War 1 and continued until the early 1930s.
- World War and the rebuild: The next supercycle began in the lead up to the Second World War. The war itself and rebuilding in the aftermath required lots of materials - it peaked in 1951, and this demand continued through to the early 60s
- Cold war and nationalisation: The early 1970s marked the start of the third cycle as commodity supply was disrupted as the Cold War saw countries nationalise industries and foreign investors pulled out. In the mid 1980s producers managed to shore up supply and the cycle faded.
- China Industrialisation: The most recent supercycle started in 2000 when China joined the World Trade Organisation (WTO) and started to modernise. The raw materials China needed to do this sparked a long bull run for commodities. The 2008 GFC put a spanner in the works but Chinese stimulus made the cycle continue through to 2014 when oil cratered on oversupply.
Our view is that we have now entered the next iteration of a commodities supercycle which started in 2020 and will run for at least the next decade:
- 5. Clean energy revolution & localisation of supply chains - We think the fundamentals for the next supercycle have been set with the world looking to transform the way energy is produced and consumed (through cleaner, renewable energy technologies) AND the push to localise the supply chains for these critical raw materials (Fallout from the Ukraine/Russia conflict).
Energy transition materials
Energy transition is a decades-long trend that we expect will show continued strength through the coming year.
Energy transition refers to the global shift from technologies that use fossil fuels (coal, oil, and natural gas) to technologies that use renewable energy sources (wind and solar, and lithium-ion batteries).
The energy transition is part about the environment and part about reducing geo-political risk by reducing dependence on fossil fuels imported from unfriendly countries.
So suddenly the world is going to need a LOT more of the commodities used to transport and store energy - lithium, graphite, cobalt, copper, manganese, nickel and rare earths.
And after a decade of under-investment in new mines combined with how long it actually takes to build a new mine (7+ years) we don’t think new supply will be coming online any time soon.
Next week we’ll go into more detail about the individual commodities that make up the energy transition materials.
Resource companies with projects at the development stage
We think 2023 will be the year for companies with projects that are ‘shovel ready’ - meaning resource definition and economic studies are complete and they are ready to start building a mine... if they can get financing.
In the early to middle stages of a commodities supercycle, commodity prices are high and the market needs mines built ASAP, so we think significant amounts of capital will start finding its way to later stage projects.
We think that security of supply issues coupled a decade of underinvestment will create a sense of urgency from both the investment community and governments leading to a wave of capital flowing into projects that are closest to being put into production.
We have also seen large global funds pull money out of big US tech companies during the tech crash of 2022 - these funds will be looking for a new sector to achieve the internal rates of return on their capital they previously enjoyed in big tech.
Financing the building of mines during a commodity cycle can deliver those returns.
Our Development Stage Investments: VUL, MNB, EMN, FYI, EMH, IRD, EV1, CAY,
Energy - Oil & Gas
2022 was as good of a year for oil and gas stocks that we have seen for over a decade as the fallout from the Russia-Ukraine conflict pushed oil prices to ~15 year highs.
We expect to see this trend continue due to decades of underinvestment in new oil and gas supply, the shift to electrification taking longer than expected, and the importance of energy independence coming into focus.
There’s a case to be made for a short term dip in energy prices due to recession risks, but this could provide entry points in interesting projects at attractive valuations.
If this scenario plays out we plan on increasing our exposure to stocks in our portfolio as well as adding new oil and gas stocks to our portfolio, specifically in frontier exploration.
Our Oil & Gas Investments: EXR, 88E, IVZ, TEE
Gold tends to outperform in years where the broader markets are underperforming OR when there are fears of a slow down.
We expect gold to outperform in 2023 against a backdrop of increasing interest rates and the heightening fears of a global recession.
We don’t think 2023 will be anywhere as bad as the mainstream media says it will be, but enough investors out there will want the safety of gold just in case it is.
Goldman Sachs commodities team agrees that the next year will be good for gold, anticipating the gold price moving to over US$2,000 per ounce over the course of 2023.
Goldman’s thesis is summarised well with the following quote, "growth concerns together with the fall in real rates should trigger a material rotation towards defensive assets".
Our Gold Investments: TMR, TTM, LCL, BPM, TG1, RAS
We see helium resources as a proxy exposure for technological advancement, an exposure that has the additional benefit of being in the commodities space as it is a finite resource that emanates from the Earth’s core.
Helium remains a critical resource, a non-substitutable, key component of many forward facing technologies.
Our Helium Investments: GGE, NHE
Unloved cannabis stocks have been sold down aggressively throughout 2022, but 2023 might prove to be a better year for these companies,
We think that with some further regulatory progress on recreational cannabis in key markets, particularly in the US and Europe, combined with more risk appetite in the market, cannabis stocks can deliver outsized returns in part because they are so currently unloved.
We’re looking to add exposure.
Our Cannabis Investments: BOD
Last year was a difficult year for the capital intensive biotech industry. The cost of capital rose with interest rates so small cap biotech companies found it difficult to raise capital at attractive rates.
We think that biotech companies this year, especially those with cash in the bank, will streamline operations with a greater focus on fewer high-priority programs to preserve capital.
For investors, we think that there is a lot of VC biotech money sitting on the sidelines, and there could be an opportunity in 2023 to invest in some bottom of the market opportunities and see a return to M&A activity in the sector.
Our Biotech Investments: ALA, DXB
Everything tech crashed in 2022, from the biggest NASDAQ tech darlings down to smaller ASX tech companies.
We think that it will be a slow six months for tech companies while access to capital becomes more and more difficult.
What this means for companies in the industry is that there will be a greater focus on conserving capital, meaning less “side projects” and more focus on the core product, leading to better innovation and better overall value for long term shareholders.
And for the lucky few small cap tech companies that deliver a material revenue growth, a significant re-rate off a very low base.
For patient investors, weakness in the tech market provides a great opportunity to enter the tech industry at a lower point.
Our Tech Investments: ONE, WHK
Part 2 of our 2023 outlook coming next week
Next week we will share our 2023 outlook for each of the key battery materials lithium, graphite, cobalt, copper, manganese, nickel and rare earths, also for energy transition themes uranium, hydrogen and renewables (solar, wind, geothermal, hydro). We’ll also take a look at growth stocks, food security and iron ore.
This week’s Quick Takes 🗣️
This week in our Portfolios 🧬 🦉 🏹
Tempus Resources (ASX: TMR)
This week our gold exploration Investment Tempus Resources (ASX: TMR) put out the strongest single drill result we have seen yet from its Canadian gold project...
28.1g/t of gold over a 28.5m intercept from a shallow depth of just 84.4m.
In the past TMR has delivered some extremely high grade hits, but only at a fraction of the intercept length of what was delivered this week. This time TMR’s hit had both grade and thickness.
We are hoping that TMR can now convert the multiple gold veins discovered since acquiring its gold project into a maiden JORC resource which the company expects to put out in Q1-2023.
📰 Read our full Note: TMR intercepts 28.1g/t of gold over a 28.5m, thickest vein we've ever seen
Pantera Minerals (ASX: PFE)
On Monday one of the world’s largest automakers (US$51BN) Stellantis, signed a $30M deal to get its hands on high purity manganese sourced from outback WA.
The deal was with Element 25 which sits inside the same region as our micro cap manganese exploration Investment Pantera Minerals (ASX: PFE).
~45km away from Element 25’s manganese resource PFE finished the first of multiple planned drilling programs at the site, hitting semi massive to massive manganese with thickness ranging between 2m to 12m.
We expect to see the results from the assays in the coming weeks.
Euro Manganese (ASX: EMN)
This week our European battery metals Investment Euro Manganese (ASX: EMN) signed an offtake term sheet with French battery manufacturer Verkor.
Verkor is a French battery manufacturing company backed by groups including Renault Group (big French automaker), Schneider Electric (massive €83BN capped French multinational) and EIT InnoEnergy (the same EIT InnoEnergy that backed Vulcan Energy Resources at 51c in May 2020).
The offtake term sheet is for EMN to deliver its high purity manganese products into Verkor’s next-gen EV batteries in Europe.
Verkor is currently busy making its first gigafactory a reality. It is seeking a reliable, local EU supply of manganese - one that's traceable, has excellent ESG credentials and a low carbon footprint.
EMN is placed to deliver this.
📰 Read our full Note: EMN signs offtake term sheet with French battery maker to supply Renault
Minbos Resources (ASX: MNB)
This week our 2022 Wise-Owl Pick of the Year Minbos Resources (ASX:MNB) executed a private investment contract with the Angolan government that will accelerate construction of its phosphate plant.
First production of phosphate fertiliser is expected from the plant later this year. However, we note that MNB is yet to deliver the share price re-rate that is commonly associated with resource companies moving from study phases to production.
MNB’s Definitive Feasibility Study (DFS) released in October showed that spending a further $48.5M could deliver a phosphate mine with a Net Present Value of between ~$200M and ~$400M, depending on the phosphate price.
To arrive at these numbers, the DFS made some assumptions about favourable tax concessions being granted by the Angolan government. This week’s announcement confirmed that these incentives and concessions have been fully granted, removing any uncertainty around the fiscal regime under which the project will be built.
📰 Read our full Note: MNB Seals Key Deal with Angolan Government - Fiscal Regime Now Clear
⏲️ Upcoming potential share price catalysts
Updates this week:
- GGE: Preparing to drill its US helium project looking for a commercially viable flow rate.
- GGE followed up the granting of its drill permit last week by announcing an extension to its offtake agreement with Paradox Resources who own the nearby helium processing facility. See our Quick Take on the news here.
- TMR: Assay results from its ~25.75m visible gold intercept at its Canadian gold project.
- This week TMR put out the single strongest drill result we have seen since we first Invested in TMR. See our deep dive on the news here.
- PFE: Assay results for manganese (Weelarrana) project.
- While we wait for PFE’s assay results, its neighbour Element 25 signed an offtake agreement with US$52BN capped global automaker Stellantis. See our deep dive on why we think this news is important here.
No material news this week:
- GAL: Is undertaking a second round of drilling at its Callisto PGE discovery in WA.
- 88E: Drilling for oil in the North Slope of Alaska next to UK listed Pantheon Resources.
- TTM: Drilling its copper porphyry target in Ecuador.
- PRL: Awaiting final execution of a joint development agreement with Total Eren.
- TYX: Assay results from its maiden drilling program at its lithium project in Angola.
- EV1: Updated DFS looking to improve on the already relatively strong US$323M NPV, Framework Agreement with the Government of Tanzania.
Have a great weekend,
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