Materials sector overview
Commodities have moved largely higher recently, with global monetary policies and a stronger global economy helping fuel gains. However, we still question the sustainability of gains and a tightening Fed gives us caution.
Market outlook for the materials sector
A broad range of commodity prices have moved higher as shown by the rise in the GSCI Commodity Index, helping reward those investors who have stayed with the materials sector as we suggested. We aren’t ready to upgrade the group, as we want to see a bit more sustainability in the gain in commodities, but we are more positive on the sector and suggest investors make sure they are at least at market weight to the materials group.
A positive economic picture in the U.S., as well as an improving European economy, are potential further tailwinds for the materials sector. Additionally, some indebted governments have scaled back their austerity plans and are focusing more closely on generating economic growth. This could provide a bit of fuel to the materials sector.
However, there is uncertainty surrounding both U.S. monetary policy and global economic growth. European economic growth has improved as mentioned above, but remains modest and they are still dealing with some structural problems. Chinese economic growth has slowed compared to the past several years, though it has stabilized recently. Also, a renewed strengthening of the U.S. dollar could hurt the sector, although that could be mitigated somewhat by better U.S. economic growth. For now, we're holding to our marketperform rating.
Factors that may affect the materials sector
Positive factors for the materials sector include:
- Increased demand: Developing countries continue to need more raw materials to support their infrastructure building.
- Accommodative monetary policy: Central banks in the developed world are now largely in easing mode, with the notable exception of the Federal Reserve, which should help to support economic activity and the materials sector.
- Reduction in austerity programs: Some global fiscal restraint measures seem to be easing, which could help to stimulate growth.
Negative factors for the materials sector include:
- Reduction in demand from China: Chinese demand for processed commodities might be slowing as technological advances and a build-out of production facilities allow the country to produce more of its own materials. China recently transitioned from being a net importer to a net exporter of steel.
- Larger inventories in China: Reports of large supplies could dampen hopes for a sharp rebound, as it could take time to work through those stockpiles.
- Increased labor costs: Wage costs are rising in the materials sector, as we've seen skilled-labor shortages in certain segments of the market.
Clients can see our top-rated stocks in the materials sector.
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