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Quarter-End Insights

Basic Materials: The Most Overvalued Sector We Cover

Propped up by Chinese stimulus, mined commodity and miner share prices remain overvalued.

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  • On a market capitalization-weighted basis, our basic materials coverage trades at a 39% premium to our estimate of intrinsic value, making it the most expensive sector we cover. 
  • Miners we cover are generally substantially overvalued, reflecting our expectation for a structural change in demand growth from China as its economy matures and transitions toward less commodity-intensive and more consumption-driven growth.
  • Gold is among the few mined commodities that isn't directly tied to the fortunes of Chinese fixed-asset investment, but as the Federal Reserve continues to pursue rate increases, prices look primed to fall in the near term.
  • We continue to expect the two big deals in the agriculture industry (Potash-Agrium and Bayer-Monsanto) to receive regulatory approval and close within the next 12 months.
  • Despite temporary hiccups, U.S. construction activity continues to build momentum; the long-term outlook remains bright for lumber and aggregates companies hitched to this wagon. 

 

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