The Materials sector is sensitive to fluctuations in the global economy, the US dollar, and inflationary pressures. Accommodative monetary and fiscal policies are underpinning global economic growth and pricing power.
Ever since the outbreak of COVID-19, the US has had the fastest economic growth in the last 40 years. This came on the back of massive policy measures that are now translating into a higher rate of inflation and interest rate increases. These economic trends boosted the value of the US dollar against global currencies such as the EUR and GBP, amongst others. The strength of the USD is reducing the cost of imports which tends to curb inflation.
While the Materials sector has experienced a strong performance YTD, it may face as from now onwards some headwinds. Yet, given the geopolitical changes we are experiencing right now, the relative and absolute attractiveness looks truly intact as one of the main opportunities consists of rebuild infrastructure to meet EV requirements.
One of the main requirements in the EV project is copper. Typical, EVs contain four times as much copper as a vehicle running on an internal combustion engine. Increased demand for EV batteries could also provide a long-term benefit for miners of the lithium, cobalt, and nickel needed to make those batteries.
Another segment of the materials sector that stands to benefit are producers of building aggregates, such as crushed stone, gravel, and sand. Aggregates are some of the most basic construction materials and are primary ingredients for roads, bridges, and buildings. Aggregates comprise more than 90% of asphalt pavement and up to 80% of a concrete mix. Highway construction will boost demand for aggregates and should directly benefit some companies that supply construction materials. Consequently, the ramifications to implement EV are far reaching and one may expect that the balance sheet of a lot of companies will be buttered-up.
Positives for the sector:
- Improving global economic growth has supported industrial metals and chemical prices – though this appears to be moderating somewhat amid slowing economic growth in China.
- Cyclical-value sector characteristics tend to be favored in the expansion phase of the business cycle.
- US clean energy and infrastructure spending could spur demand for industrial materials.
- Recent sector performance weakness has improved valuations.
Negatives for the sector:
- The slow recovery in the oil rig count is a headwind for chemicals, and high energy prices have raised the cost of chemical production.
- Momentum has weakened recently.
- Significant supply chain bottlenecks may be constraining economic growth.
- Global deglobalisation as the result of the Ukrainian war
Risks for the sector:
- An increase in global COVID-19 cases
- Potential stringent environmental regulations
- Strong US dollar and/or weaker-than-expected economic growth
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This sector is one of the most correlated to global industrial production. The sector is highly leveraged to an improvement in manufacturing sentiment. As economic data strengthens, sentiment should improve and be a positive driver. However, higher materials pricing (e.g., steel) is likely unsustainable at current levels and could lead to future stock underperformance.
At present, we favor the following companies to consider: Air Liquide, BASF, DSM, Sika, and Linde Plc. |