A combination of factors is feeding through to strong performance of the Materials sector. Precious metals, in particular, have propelled the sector given their various applications and low stockpiles. Looking ahead, there are important themes that could propel the overall sector, including reflation, demand from China and sensitivity to economic growth.
Investors seeing the supercycle
We have seen significant investor attention on reflation as one consequence of the economic reopening story. Among the headlines is the commodity supercycle and its implications for equities. Figure 1 shows how far a wide range of commodity prices have risen month to date.
The largest price moves have come from natural gas and crude oil. And while these moves are impressive, some of the drivers of this phenomenon (primarily the disruption to production caused by the deep freeze in Texas and surrounding US states) are likely transitory.
Meanwhile, the driving forces behind the rise in industrial metals may have more longevity. Interestingly, acceleration of US producer prices in January and a strong ISM manufacturing prices index have indicated that suppliers have pricing power for a range of intermediate materials prices like metals, chemicals and plastics.
In light of the above dynamics, one sector in particular should benefit: Materials.
Figure 1: S&P GSCI Single Commodity – MTD Performance (%)