A slowdown in demand in China — the world’s biggest consumer of commodities — amid the coronavirus pandemic put the Basic Materials sector on thin ice for much of the first half.
Commodities have been among the hardest hit since the lethal respiratory virus started spreading globally. Fears that a possible hard landing of China’s economy amid the pandemic would kill the country's appetite for raw materials triggered a sell-off in most commodities during the first quarter of 2020. Some of the major industries in the Basic Materials space such as chemicals and steel have been walloped by the virus-led demand destruction. Notably, the sector lost roughly 33% in the first quarter and around 9% in the first half.
However, the Basic Materials sector has staged an impressive rebound in the third quarter on improving economic conditions, demand recovery in China and rising commodity prices. Notably, the Zacks Basic Materials sector has gained 9% quarter to date, outperforming the S&P 500’s growth of 7%.
The revival of China demand is the prime reason behind the sector’s recent rebound. China is gradually clawing out of the coronavirus-induced stupor as industrial activities are picking up pace following easing of restrictions. China’s economy returned to growth in the second quarter after a sharp decline of 6.8% in the first quarter — the first contraction in decades as lockdown restrictions hurt industrial production and retail sales. China’s GDP grew 3.2% year over year in the second quarter, aided by strong industrial production that rose 4.4% year over year in the quarter.
Meanwhile, China’s manufacturing activities picked up after slumping in the first quarter on a rebound in domestic demand and government’s efforts to mitigate the impacts of the pandemic. China’s official manufacturing purchasing managers’ index (“PMI”) expanded for the sixth consecutive month in August on strength in its services sector. While the manufacturing PMI eased slightly to 51 from 51.1 in July due to flooding in parts of China, it remained in the expansion territory.
China’s industrial output also grew at the fastest pace in eight months in August while retail sales rose for the first time in 2020 last month, suggesting that economic recovery is on a firm footing. China’s value-added industrial output rose 5.6% year over year in August, strengthening from a 4.8% increase in July, per the National Bureau of Statistics.
Moreover, China’s automotive sector is recuperating from the virus-led crisis. Government stimulus and attractive discounts from automakers and dealers have revived consumer demand. Business activities in the construction sector are also gaining momentum. China government’s infrastructure push is expected to support the construction sector moving ahead.
The economic recovery in China is expected to continue on further improvement in domestic demand and government support. Beijing is looking to stimulate the economy with big infrastructure spending. China, earlier this year, unveiled a roughly $500-billion stimulus focused on tax cuts, infrastructure projects and job creation to get the economy back on its feet.
Meanwhile, gold has been the bright spot in the Basic Materials space this year as fears over the coronavirus pandemic made it the most attractive safe-haven asset. Gold prices gained around 13% in the second quarter — the biggest quarterly percentage increase in more than four years.
Notably, gold prices broke above the $2,000-an ounce mark in end-July and hit an all-time high of $2,089 in early August. Global uncertainties over the coronavirus pandemic, the ultra-low interest rate environment and renewed U.S.-China tensions are among the factors that contributed to bullion’s rally. However, prices have retraced of late on a strengthening U.S. dollar partly due to concerns over fresh lockdowns in Europe amid a resurgence of coronavirus infections as well as uncertainties over the next U.S. economic stimulus package. Nevertheless, bullion notched a gain of roughly 20% this year.
Also, China’s rebound has played a key role in the copper price recovery. The widely-used industrial metal took a beating in the first quarter amid a slowdown in demand in China (a top consumer) due to virus-led containment measures. However, prices of the red metal have surged more than 50% from the lows witnessed in March. Surging demand in China and supply chain disruptions amid the pandemic have largely contributed to the rally. Notably, strong demand in China underpinned by a rebound in industrial production recently powered copper prices to a fresh two-year high.
Demand strength in China on surging crude steel production has also propelled iron ore prices to their highest level in six years recently. A recovery in China is driving demand for the steel-making commodity, as reflected by rising imports. Moreover, worries over a supply shortage from Brazil, a country battered by coronavirus, are contributing to the spike in iron ore prices. The worsening coronavirus situation in Brazil, a major producer, has put iron ore supply at risk.
5 Materials Stocks to Snap Up
The Basic Materials sector has made a strong comeback after being in a rut for a spell, making it one of the hottest sectors right now. Rising demand in China would augur well for the sector. As such, it would be prudent to zero in on some quality stocks in the materials space that boast healthy prospects.
We highlight the following five stocks, with a solid Zacks rank, that are worth considering for investment right now. Our research shows that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer good investment opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.
The South Africa-based gold miner, carrying a Zacks Rank #1, has an expected earnings growth of 124.2% for the current year. Over the last 60 days, the Zacks Consensus Estimate for its current-year earnings has gone up 6.8%. Moreover, the company has an estimated long-term earnings growth rate of 25.6%. Its shares have also gained around 19% over the past six months.
The Brazil-based iron ore producer sports a Zacks Rank #1. The company has an expected earnings growth of 6.9% for the current year. The consensus estimate for its current-year earnings has also gone up 20.4% over the last 60 days. The company also has an estimated long-term earnings growth rate of 22%. The stock is up around 33% over the past six months.
This China-based leading producer of high-purity polysilicon currently carries a Zacks Rank #1. It has an expected earnings growth rate of 348.5% for the current year. The Zacks Consensus Estimate for its current-year earnings has moved up 24.5% in the last 60 days. The company has delivered an earnings surprise of 177.8%, on average, over the trailing four quarters. It has also seen its shares rally around 108% over the past six months.
The Australia-based leading global resources company has a Zacks Rank #1. It has an expected earnings growth of 14.3% for the current year. The Zacks Consensus Estimate for its current-fiscal earnings has been revised 24.3% upward over the last 60 days. The company also has an estimated long-term earnings growth rate of 4.1%. Its shares have also gained around 39% over the past six months.
The Ohio-based manufacturer of consumer lawn and garden products, carrying a Zacks Rank #1, has an expected earnings growth of 60% for the current fiscal year. The consensus estimate for its earnings for the current fiscal has also gone up 22.6% over the last 60 days. The company has delivered an earnings surprise of 7.3%, on average, over the trailing four quarters. Its shares have also rallied 47% over the past six months.
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