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Quarter-End Insights

Basic Materials: Propped Up and Too Expensive

Bolstered by unsustainable, debt-fueled Chinese construction spending, much of the sector is overvalued.

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  • On a market-capitalization-weighted basis, our basic materials coverage trades at a 24% premium to our estimate of intrinsic value, making it the most expensive sector we cover.
  • Mining shares have faltered as the effect of China's stimulus has waned, but most still look expensive; so, too, do U.S. steel stocks, which had enjoyed a China-led and Trump-abetted runup.
  • We see comparably less downside among gold miners, but we expect rising real interest rates to curtail investor demand for gold in the quarters to come.
  • Regulators continue to take a light-handed approach to business combinations in the seeds and crop chemicals industries; each of the three big deals announced in 2016 should close this year.
  • Despite temporary hiccups, U.S. construction continues to build momentum; the long-term outlook remains bright for lumber and aggregates companies hitched to this wagon.

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

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