Alma Recurrent Global Natural Resources Fund

Market Review and Outlook

Portfolio Discussion

Global natural resources markets outpaced broader markets as improving economic prospects and increased inflation expectations supported the sector. The Alma Recurrent Global Natural Resources Fund rose 4.67%, outperforming the S&P Global Natural Resources Index’s 2.10% return. During the month, the portfolio’s overweight position and stock selection in the steel sector both added significant value, as did portfolio holding Alcoa. Stock selection in the Oil and Gas Exploration and Production mildly detracted from performance during the month.

Investment discussion

Unemployment and inflation almost never go together, but they coexist today – why?

Historical periods of weak/negative GDP growth and elevated unemployment have generally coincided with low inflation and negative commodity price performance. This relationship is well established: During the 40 years from 1979 to 2019, periods of rising unemployment and falling GDP have generated negative average producer price index (PPI) inflation readings and typically more strongly negative PPI Commodity Index (PCI) readings. Today, both of those metrics are in positive territory, as shown in the charts below. Given the lagged nature of these datasets, these metrics are all but certain to continue their increase in coming months.

Data through February 28, 2021. Source: Bloomberg data, Recurrent research.

Within the PPI Commodity Index, oil and copper, as well as their derivatives, are significant components – we see below that those commodities are also unusually strong given the current macro environment, compared with the historically very negative commodity performance in recessionary environments over the last 40 years.

Data through February 28, 2021. Source: Bloomberg data, Recurrent research.

Inflation today looks restrained… but only if we assume today’s COVID-impacted economy is already “back to normal” – which it clearly is not

Today, these leading indicators of inflation remain restrained, by the standards of a “normal, healthy” economy. But as shown above, when we restrict the data to include only recessionary periods (when unemployment has grown >35% Y/Y, when GDP growth is almost always negative), we see that today’s environment is highly anomalous. Given the painful memories of commodity performance in 2020 during the depths of COVID, it is understandable that allocators are hesitant to add commodity-levered assets early in the post-COVID recovery – but as inflation continues to accelerate and fiscal stimulus impacts the real economy, out-of-favor asset classes like natural resources may once again become core holdings as investors from current positioning – which seems to be overweight in assets like growth equities and bonds, which benefit from low rates – into a more inflation-resilient posture.