Materials sector overview
Commodity price improvement has flattened out recently, with the Federal Reserve and European Central Bank pursuing gradual tightening policies, and global economic growth concerns dampening enthusiasm.
Market outlook for the materials sector
The materials sector has struggled at times over the past year as global growth concerns appear to have combined with trade dispute worries to undermine performance during certain periods. We continue to believe, for now, that those concerns are overdone and that a market weighting in the group continues to be appropriate, but we are growing a bit more concerned that we could be near the peak of this growth cycle. Should data weaken further, or trade disputes continue to escalate, we would likely consider downgrading this more economically sensitive group.
However, a still-solid economic picture in the U.S., as well as a decent European economy, are potential 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, the possibility of a damaging trade war cannot be discounted and remains a risk to the materials sector. Additionally, there is uncertainty surrounding both U.S. monetary policy and global economic growth. European economic growth has improved, but remains modest and European countries are still dealing with structural problems. Chinese economic growth has slowed compared to the past several years, though it has stabilized recently, and the country appears to be enacting measures to stimulate the economy (Bloomberg). Also, a further 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.
- 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.
- Trade concerns: If current trade disputes escalate into a full-blown trade war, the globally involved materials sector could be hurt.
Clients can see our top-rated stocks in the materials sector.
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