September Mining Equities Lag Commodities as Liquid Leaders Buy Quality

Derek Macpherson (0:00)

Welcome back to the Compass. It's another interesting time in markets, and so we're looking forward to talking to them about, with talking to you about them. With me as always is Sam Pelaez, President, CEO and CIO of Olive Resource Capital. My name is Derek Macpherson, I'm the Executive Chairman of Olive. I guess, Sam, talking about volatility and kind of easy come, easy go, we put out our monthly numbers for Olive on our performance.

And September was not a lot of fun for Olive.

Samuel Pelaez (0:37)

September was not a lot of fun for the resource complex globally.

We're not the only ones, actually. If you look at our performance, we did better than the, not the benchmarks but the reference indices that we track. But what I would say is the month of September was a complete reversal of the previous month, as in the US dollar rallied, risk, kind of market risk premia increased, as in volatility increase and people were moving away from the risk side of the spectrum, which is interesting because not all commodities were down. Actually, the vast majority of commodities were up for the month. But if you look at any resource linked index, major index, all of them were down. So this was really more of a equities were down and commodities being up, which there's very little you can do about this period, so then just be sure that you're well-positioned to write them out in terms of having a strong portfolio.

Derek Macpherson (1:38)

Yeah. I mean, the risk-off thing is interesting because it really started with the rate hike. It actually really started the end of August when Warsh came out and said, as Jackson Hole's speech basically said that, hey, we're going to control inflation again. No news there. They had a rate hike in the mid-month, and I think that was priced in, and we saw that coming through. But you look at that, and then fast forward, I guess we're now three weeks from that rate hike.

The US and markets in general have a problem in long-end bonds. Long-end bonds, the rates keep going up. I don't know if that's a bit of the bond vigilantes or whatever, but you couldn't...

I was listening to a podcast earlier today, and their point was pretty clear. It was pretty easy to manipulate the equity markets, but the bond markets thought so much, because they're so much bigger and deeper, and the derivatives aren't as easy to use to move the bond market. So the fact that I think shortly after the last rate hike, there's like six rate hikes priced in over the next year, including two more this year. I think there's only two meetings left this year, or might only be one. So I think that's pretty aggressive from, sorry, not priced in, but high probability that they would occur. I think that those are pretty aggressive outlooks. I think it's a little bit overcooked on the downside on that risk off trade, but we're also going into the election. We're going into, we still have high energy prices because of the, because of, not really because the strain of her moves, but because of the lack of refining capacity in the Western world. So I think that there's some, like, there's some factors that are creating this risk off the trade. I mean, I think the volatility shocks that we were getting from, the volatility shocks that we were getting from the strain of her moves are probably are done at this point. I think the more, more focus is shifted to rates and the US and the midterm elections.

Samuel Pelaez (4:04)

Yeah, no. So if you do a recap of what's going on around the world outside of resources, just generally, obviously, you have, like you said, the threat of further rate hikes, which is positive for the dollar, conversely, negative for global liquidity in general, which also obviously affects the natural resource risk spectrum, where we and most of the people that follow this sector are positioned. You have bond yields not just rising in the US., but now in Europe. France yields are shooting up and then a bunch of other eurozone, euro countries, euro currency nominated countries are also rallying on that. You have the US elections. Now you have elections in Spain. You have elections in France, in Q1, I believe, or maybe in April, but that's tomorrow morning.

We're starting to see quite a lot of those major events that typically derail markets from their natural normal functioning. On top of the much discussed that we probably heard before, the I am the House now statement from Scott Besson, Treasury Secretary. So I would say the market seems to be driven a little bit more by headlines than fundamentals. So that I think is what has led to this dissociation from the commodity performance and the equity performance. You could think about that as an opportunity. For us, we do think so, but you know we are huge on seasonality and the seasonality of September and October is typically quite negative, in particular for the resource sector. So we're not rushing in to scoop things right this moment, but we're certainly picking away at a few things, mainly things that we already own and that we know very well. But I do think we may be able to get better entry points in the not so distant future.