Materials sector overview
The escalation in the trade dispute with China has hurt the sector, which has foreign exposure, at times. However, the group has performed better lately, validating our marketperform rating for now.
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. But those concerns may have been overdone, as we believed they were, and the sector has bounced over the past month and is now trading roughly in line with the overall market year-to-date. Risks to the group appear to be rising, as the Chinese Markit PMI recently moved close to territory depicting contraction, and the trade situation between China and the U.S. has deteriorated of late. Those risks haven’t risen to the level warranting a downgrade of the group in our minds—but we are watching developments closely.
The U.S. economy still looks like it’s in decent shape to us, while China is attempting to stimulate its economy. 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 and helps to offset some of the above risks in our view.
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), while the U.S. Federal Reserve’s tone has gone from hawkish to dovish in the course of the last six months, in our view. Fed funds futures are now pricing in a 90% chance of two rate cuts by the end of the year—which, if they happen, could help to support this economically sensitive sector. As a result, 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: Reduction in austerity programs: Some global fiscal restraint measures seem to be easing, which could help to stimulate growth.
- More-accommodative central banks: The Federal Reserve and European Central Bank both appear to be moving to an easier stance, which could help to support commodities demand.
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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