Global Market Commentary

January 26, 2017

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Tailwinds Still Strong For U.S. Materials Industries

Back in early 2016, when Donald Trump’s victory in a contentious Republican Party primary still looked unlikely, the global commodity complex reached the bottom of the decline that had begun in mid-2014.

From that bottom, commodities rose unevenly through the rest of the year.  Then they got another powerful impetus after the presidential election in November.  Sentiment took a decisive turn to the positive among businesses and market participants.  Many investors, consumers, and analysts seemed finally to break through the fear that the global economy was stalled in a prolonged disinflationary trend.  Growth began to look possible again and “animal spirits” made themselves strongly felt.

Thus, there are two basic tailwinds behind materials: the turn of a global cycle, and now the arrival of a new administration — and along with it a new optimism about prospects for economic growth.  As usual, many Wall Street analysts are cautious in integrating these new developments into their views, so when we look at stocks through their lens, they can seem to be fully valued.  Still, we believe that further positive developments — the ongoing inflection in fundamentals, in the regulatory environment, and in psychology — will eventually be incorporated into analysts’ models, and will support higher stock prices.   

The U.S. Is Best

U.S. companies seem to us to be best-positioned in this new environment.

In materials — steel, base metals, construction materials, and fertilizer, for example — we see particular positives for U.S. producers who will benefit from a stronger U.S. dollar, buying their inputs abroad and selling their goods in the United States.

U.S. companies will also benefit from the new administration’s policy priorities.  Two new appointees — Wilbur Ross, the new administration’s nominee for Secretary of Commerce, and Robert Lighthizer, the appointee for U.S. Trade Representative — have deep business experience in the steel industry.  (Former Nucor [NYSE:  NUE] CEO Dan DiMicco is also one of the new president’s key advisors.)

New Regulators Bring New Strategies That Support  the Shares of U.S. Materials Companies

At Mr. Ross’ confirmation hearing last week, the nominee said that he would not hesitate to initiate trade cases pre-emptively, and noted steel and aluminum as industries of particular interest to him.  In other words, he won’t always wait for U.S. companies to complain before acting.  He believes that the Department of Commerce should pursue such a pre-emptive strategy in order to signal its seriousness.  He also indicated that he would reduce the time it takes to process cases when the alleged dumpers are being uncooperative and obstructing investigators.  His inside knowledge of the business will make him wise to dumpers’ stratagems, and we believe this will make him more effective than regulators who lack such detailed operational experience and competence.

 

Source:  Bloomberg

U.S. producers will benefit from this more vigilant and proactive defense.  While they enjoy lower import prices, they will also enjoy pricing power when they sell into the U.S. market.  As the new administration’s policies unfold, we believe a similar pattern will emerge in many industries.

In the meantime, the global tailwinds continue, with demand increasing for many commodities worldwide.  In the U.S. and elsewhere, policy talk continues to be a shift from monetary stimulus to fiscal stimulus, both tax cuts and infrastructure spending.  Given the continuing clarification of supportive U.S. trade policy, and the continued strengthening of economic growth and business psychology inflections in the U.S. and elsewhere, we will like some U.S. materials stocks on a correction — particularly fertilizer, steel, and aluminum.

Investment implications:  Materials stocks began to rally in early 2016 after global commodities hit bottom and began to recover.  That rally got a powerful impetus in November with the prospect of a new U.S. administration and a more supportive and proactive defense of U.S. companies against foreign firms engaging in dumping and other unfair practices.  While U.S. materials stocks have risen in price, we continue to see them as attractive in any correction — especially steel and aluminum.  In our opinion, 2017 is shaping up to be a year in which the astute selection of individual stocks, and concentration in sectors and industries with positive tailwinds, can outperform simply buying a broad index-tracking fund.

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