Critical materials start 2023 with a bang
We are pleased to introduce Sprott Energy Transition Materials Monthly by Paul Wong, CFA, Market Strategist and Jacob White, ETF Product Manager. At Sprott, we believe the global clean energy transition will grow more urgent as energy markets continue reordering and energy security becomes synonymous with national security.
January was a solid month for risk assets as investment funds were underexposed for a positive, right-tail16 outcome. The significant left-tail risks of 2022 quickly faded or reversed as we headed toward the new year. In the U.S., fears of hyperinflation and more Federal Reserve rate hikes abated as the Fed signaled it might slow its rate hikes just as inflation data finally moderated.
For the period from January 2, 2020, to February 13, 2023, NSETM™ outperformed the S&P 500 and the MSCI World Metals and Mining Index by considerable margins. In our view, the technical patterns support a continuation of this trend. Of note, NSETM™ and the MSCI World Metals and Mining Index have a high correlation since they both represent metals mining equities, but NSETM™ has the added secular growth element of the energy transition.NSETM Index vs.
From an investment cycle perspective, we are likely in the early stages of this commodity supercycle. In the 2000s commodity supercycle, China joined the World Trade Organization in 2000, and commodity prices made their lows in the 2002 recession. Despite fantastic performance for the commodity complex in 2003 and 2004, it was not until 2005 that investment inflows began reaching the level that acknowledged that commodities were in a demand shock-driven market.
China is the biggest consumer of virtually every commodity and has an outsized pricing effect due to its binary approach to stimulus. While China's impact may change in the future due to growing metals demand in the energy transition and further deglobalization, China will dominate in the short term. In Figure 4, we plotted the China credit impulse 12 months forward.
Nuclear energy has a very low full-cycle carbon footprint and is the most reliable baseload energy source. Renewable energy has much lower capacity factors than nuclear, and therefore nuclear energy has begun to see increased government attention with its ability to offset this intermittency. There has been an unprecedented number of announcements for nuclear power plant restarts, life extensions, and new builds, which are likely to create additional demand for uranium.
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