Many forces and drivers impact the materials sector. But over the past year or so, one driver has been preeminent: the state of the economy.
As a cyclical sector, materials stocks tend to rise and fall with the broader economy. And with the economy seemingly perched on the precipice of recession for more than a year, materials stocks have not been in favor.
However, the economic cycle will inevitably continue to evolve in 2024. Any eventual economic brightening could act as a catalyst for the stocks. And favorable supply-demand dynamics in some areas of the sector could set up a constructive outlook for the year ahead.
A positive, but slow, past year
The materials sector encompasses industries such as chemical producers (including makers of fertilizers and industrial chemicals), metals producers (including gold and copper miners and steelmakers), makers of construction materials (such as cement, bricks, glass, and gravel), and producers of wood-based goods (such as lumber and paper packaging). These industries operate in global markets, and demand for these goods tends to be highly dependent on the state of the broader economy. For example, construction materials are likely to be in higher demand when the economy is booming. For that reason, materials are inherently a cyclical sector, meaning they tend to move in sync with the economy.
In 2023, the sector’s performance reflected this close relationship. Like the broader economy, the materials sector still eked out positive growth. But like the broader economy, the sector’s performance was sluggish—hampered by investor concerns over recession risk.
While the sector lagged the double-digit returns of the S&P 500®, it’s important to remember that the S&P’s gains were disproportionately driven by a handful of mega-cap growth stocks—particularly companies in the technology and communication services sectors that were seen as plays on the rise of artificial intelligence. Amid such narrow leadership, materials simply didn't shine.
Looking beyond short-term economic sensitivity
For 2024, the sector’s performance may continue to be driven primarily by macroeconomic issues. And to be sure, if a recession finally materializes, it could weigh on the stocks over the short term. But eventually a new cycle of economic growth is likely to emerge—whether after a recession or after a so-called “soft landing”—which could benefit materials stocks.
In managing Fidelity® Select Materials Portfolio (
The difference between the two, in my view, is in their respective supply profiles. Copper supply has been challenged for some time now, and could become increasingly tight in the years ahead. Copper mines are aging, and the quality of the ore produced has been decreasing in key producing countries like Chile and Peru. Although demand for copper dipped a bit this past year due to China’s economic headwinds, I believe that an eventual pickup in demand could trigger a rally in copper prices, because supply will be tight. Freeport-McMoRan (
By contrast, there is really no shortage of lithium, and there are new industry entrants that will likely further increase supply going forward. So even if demand grows as expected, I don’t believe the long-term picture for commodity prices is as attractive for lithium as it is for copper.
Fund top holdings1
Top-10 holdings of the Fidelity® Select Materials Portfolio (
- 23.9% – Linde PLC (
) - 6.6% – Freeport-McMoRan (
) - 5.9% – LyondellBasell Industries (
) - 5.2% – Air Products & Chemicals Inc. (
) - 4.3% – CF Industries Holdings Inc. (
) - 4.3% – DuPont de Nemours Inc. (
) - 4.1% – Corteva Inc. (
) - 3.7% – Celanese Corp. (
) - 3.3% – The Chemours Co. (
) - 3.3% – AptarGroup Inc. (
)
(See the most recent fund information.)
Potential opportunities in chemicals and gasses
Elsewhere in the portfolio, I’ve recently identified opportunities in a group of US chemicals companies, particularly within the commodity chemicals segment. These are chemicals made on a large scale and used to produce other chemicals, which, in turn, are used to produce a range of end-user products, including construction materials, adhesives, plastics, and more.
Many of the US firms in the segment employ natural gas in their manufacturing processes, which gives them a cost advantage over their European counterparts, who use oil. US energy prices are generally lower than those in Europe, and this difference is even greater when comparing US natural gas to European oil. These cost advantages have translated into pricing advantages for US companies, which I believe could help this group gain market share and sales. Recent fund holdings among such US chemical producers have included LyondellBasell Industries (
Lastly, while I tend to focus the fund on stocks I believe are poised to benefit from the economic cycle, I also try to maintain stability in the portfolio via steady, non-cyclical companies, as long as they are in what I consider to be improving end markets. Industrial gas company Linde (
Focusing on stocks with favorable supply-demand profiles
Materials stocks could remain in a holding pattern until the Fed and other central banks end their rate-hiking cycles and start lowering interest rates.
While I can’t control what the Fed or the economy will do, I can control the fund’s positioning. With that in mind, I have aimed to position the portfolio for the eventual upturn in the economic cycle that may occur if or when rate cuts begin. Some materials stocks have traded at depressed valuations, and I’ve been able to establish or add to holdings in well-positioned companies at inexpensive prices in recent months. I may continue to seek areas of the sector that I believe have the strongest supply-and-demand profiles, and which I believe could respond well to a growth rebound.
Ashley Fernandes is the Natural Resources sector leader and a portfolio manager in the Equity division at Fidelity Investments. Fidelity Investments is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing, and other financial products and services to institutions, financial intermediaries, and individuals.
In this role, Mr. Fernandes provides research coverage for the global integrated energy and global mining companies and he manages the Fidelity Natural Resources Fund. He is also a member of Fidelity's Stock Selector Large Cap Group and is responsible for managing the energy and materials sleeves for various diversified sector-based portfolios. Mr. Fernandes is also responsible for co-managing the Fidelity and Fidelity Advisor Balanced Funds, VIP Balanced Portfolio, Fidelity Select and VIP Materials Portfolio, and Fidelity Advisor Materials Fund. Additionally, he co-manages both the global energy and global materials sector sleeves of the FIAM sector portfolios.
Prior to assuming his current role, Mr. Fernandes worked as a global energy analyst for Fidelity International Limited (FIL) in London from 2008 to 2013. In this capacity, he was an analyst for the U.S., Canadian, European integrated, and emerging-market energy sectors, as well as small- and mid-cap international exploration and production (E&P) companies.
Before joining Fidelity in 2013, Mr. Fernandes worked as an associate in Private Equity. He has been in the financial industry since 2001.
Mr. Fernandes earned his bachelor of commerce degree, with honors, from Queen’s University, and his master of business administration degree from London Business School. He is also a CFA® charterholder.