INSUBCONTINENT EXCLUSIVE:
NEW YORK: Even as the lift from optimism over prospects for US-China trade detente shows signs of wearing off for the wider US stock market,
upbeat sentiment around China’s economy could bolster shares of materials companies.
Shares of SP 500 industrial and technology companies,
which were buffeted by last year’s tit-for-tat tariffs as well as slowing global demand, have been very responsive to progress in US-China
trade relations and a strengthening Chinese economy
This year, those sectors have outpaced the ascent in the SP 500, which reached a record closing high on Tuesday.
Materials stocks have not
been as sensitive, however, even though they also stand to benefit as a stronger Chinese economy lifts global consumption and industrial
As China has taken measures to stimulate its economy, its economic data have turned more upbeat
That in turn could aid global growth, which has flagged as a result of China’s cooldown.
“What we’re seeing is China spending more on
stimulus: fiscal stimulus and monetary stimulus,” said Kristina Hooper, chief global market strategist at Invesco in New York
“That’s likely to be a positive for materials.”
The People’s Bank of China has cut banks’ reserve requirement ratio five times
over the past year and is widely expected to ease policy further to spur lending and reduce borrowing costs
The stimulus appears to have boosted Chinese economic data, with factory activity growing in March for the first time in four months.
Yet so
far in 2019, the SP 500 materials index has underperformed the SP 500 at large, rising just 11.9 per cent compared with 16.7 per cent for
Moreover, it is among the biggest decliners in the period since the SP’s previous record closing level on Sept
The materials index has fallen 7 per cent over those seven months, versus a 5.2 per cent gain for technology and a 3 per cent loss for
Only the energy index has dropped more over that period.
A trade agreement could serve as a catalyst for a bump in materials shares as a
drag on China’s economy is lifted, some market strategists say
Some commodity prices, including those for copper and oil, have ascended this year as the prospects for the global economy have somewhat
brightened.
“It all goes back to the global growth outlook,” said Andrea DiCenso, portfolio manager for alpha strategies at Loomis
“With the front run in hard data, we’re beginning to see a pretty significant rally.”
Additionally, a trade agreement is expected to
include commitments from China to purchase higher quantities of US products such as soybeans, which could benefit companies that make
agricultural chemicals, including DowDuPont Inc and CF Industries Holdings Inc.
CF Industries is scheduled to report quarterly results after
the bell on Wednesday, and DowDuPont is scheduled to report before the market open on Thursday.
To be sure, even with a trade agreement,
some materials companies could face price pressures
Shares of Freeport-McMoRan Inc fell 10.1 per cent on Thursday after the copper mining company posted a lower-than-expected profit as its
production slipped and its costs rose.
A rollback of tariffs on Chinese imports, particularly aluminum and steel, would likely prompt a fall
in some commodity prices, which could hurt prospects for certain materials companies, said Gene Goldman, chief investment officer at Cetera
Investment Management in El Segundo, California.
Even so, those drawbacks may be outweighed by the support for global demand fostered by a
US-China trade agreement.
“You could see a number of companies with lowered expectations bring them back up as they talk favorably about
the impact that a trade deal would have on them,” said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York.