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Quarter-End Insights

Basic Materials: Fates Tied to Faltering China

Despite significant share price declines in recent months, the materials sector is not a land of investment opportunity.

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  • Despite significant share price declines in recent months, the materials sector is not a land of investment opportunity. The average stock under our coverage trades at a 6% premium to our assessment of intrinsic value. However, the mean masks significant dispersion of valuation assessments.
  • We continue to forecast weak Chinese fixed asset investment and commensurately tepid demand growth for related commodities such as copper and iron ore.
  • We remain relatively bullish on commodities oriented to the Chinese consumer but nonetheless expect Chinese household consumption growth to decelerate from the trailing 10-year average.
  • Companies are responding to tectonic shifts in the macroeconomic environment by reorganizing their portfolios. Miners coping with poor Chinese demand and weak commodity prices are looking to sell assets and shrink. Agricultural chemical companies have taken a different approach. Faltering crop prices have prompted many to seek mergers in a bid to cut overhead and grab synergies.

Daniel Rohr does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.