5 Basic Materials Stocks To Buy On Strong Momentum

After a nightmarish 2015, this year brought a ray of hope for the basic materials sector, which encompasses a broad range of industries ranging from mining and metals to chemical products. Last year, prices hit multi-year lows due to the economic weakness in China and the first hike in interest rates in almost a decade. Even though concerns over China’s future growth continue to cloud the sector’s outlook, there are plenty of reasons to be optimistic about the sector over the long term.

What Has Turned the Tables This Year?

Let’s have a look, industry by industry, at what has changed for the sector.

Metals - Gold has been the best performing asset this year, trumping major equity indices, investment grade and high yield bonds and commodity indices. A weakening greenback, slowdown in China, volatile equity markets and introduction of negative interest rates by several of the world’s central banks (including Japan) have spurred safe-haven demand for gold leading to an 18% gain so far. Silver, in tandem, has clocked a 25% gain so far. A delay in raising interest rates elevates demand for gold and silver.

Gold prices are generally supported by retail demand for the metal in the latter part of the year, as it is a seasonally strong period in countries like India and China. Moreover, pent-up demand due to the shutdown of jewelry stores in India in the first quarter will likely be a catalyst this year. With rising safe-haven demand and dwindling supplies, gold and silver prices are set to gain.

Copper prices have also gained on the back of a weaker U.S. dollar on Brexit fears. Demand for copper will remain strong, supported by its widespread use in transportation, manufacturing and construction, limited supplies from existing mines, and the absence of new significant development projects.

For aluminum, automotive, packaging and airline industries are expected to support demand. India appears promising given its currently low levels of aluminum consumption and high urban population growth. With demand being strong, the industry needs to pull the reins on supply, which will lead to deficits for a prolonged period and create the ground for higher aluminum prices, going forward.

Iron & Steel - The housing and construction sector is the largest consumer of steel today and, consequently, of iron ore. In the U.S., an improving job market and a strong housing sector will lead to 3.2% growth in steel demand this year. Even though the U.S. steel industry continues to be under the threat of cheaper imports, imposition of anti-dumping duties are expected to help American steel makers defend their turf against illegally dumped steel products. Much hope is also pinned on India, which is touted to be the next growth engine, given its progressive construction and manufacturing sectors, rapid urbanization and structural reforms.

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Chemicals - Despite a spate of headwinds including concerns over China’s economy, weakness in Europe, soft agriculture market fundamentals and weak demand in the energy space, the recovery in the chemical industry is expected to continue through 2016, aided by strength in the light vehicles market, an upswing in the housing sector and significant shale-linked capital investment.

Growing Prospects This Year

New York-based aluminum giant, Alcoa Inc. (NYSE:AA) will once again kick start the second-quarter earnings season with results scheduled for Jul 11 after the market closes. For the basic material sector, even though earnings are expected to decline 15.1% in the second quarter, a dramatic recovery is projected for the latter half of the year with 5% growth in the third and 17.3% in the fourth. (For a detailed look at the earnings outlook for this sector and others, please read our Zacks Investment Research

Written By: Zacks Investment Research