Materials sector

Materials have had a sluggish, if positive, year in 2024—held back by ongoing worries about the strength of the U.S. economy, an economic slowdown in China, and relatively high interest rates globally.

For 2025 and beyond, performance in this highly cyclical sector is likely to continue to track the ups and downs of the U.S. and global economies. If interest rates continue to fall, as they have begun to in many major economies, it could usher in a new cycle of growth to help propel the stocks. Yet even without a tailwind from the macro environment, I believe there are compelling supply-and-demand dynamics in parts of the materials sector that have created potentially attractive setups for some of these stocks.

2024: Growth, but also volatility

The materials sector encompasses industries such as chemical producers (including makers of fertilizers and industrial chemicals), metals producers (including gold and copper miners and steelmakers), makers of construction materials (such as cement, bricks, glass, and gravel), and producers of wood-based goods (such as lumber and paper packaging).

These industries operate in global markets, and demand for these goods tends to be highly dependent on the state of the global economy. For example, construction materials are likely to be in higher demand when the economy is booming. For that reason, materials are inherently a cyclical sector—rising and falling with the strength of demand for these goods in the U.S. and globally.

In 2024, this sensitivity generally hampered the sector. Although the U.S. has seemed to continue to avoid recession, fears of a downturn plus relatively high interest rates weighed on the stocks for much of the year. The sector was also hurt by an economic slowdown in China—which is the world’s largest industrial economy and therefore an outsized consumer of many materials, including steel, copper, chemicals, and construction inputs. The Chinese economy has been facing flagging consumer demand and a sharp property market downturn.

2025: Watching policy and the economic cycle

After a painful period of rate-tightening, the U.S. Federal Reserve, the Bank of England, and the European Central Bank have all begun cutting rates. While more rate cuts aren’t guaranteed—given that many economies are still on edge about recent high inflation—it’s possible this is still the early stages of a global easing campaign.

In the past few months in China, the government has unveiled initial economic stimulus packages and has signaled that additional stimulus could be on the table in 2025. The possibility of global monetary easing and a recovering Chinese economy could bode well for growth, materials markets, and materials stocks in 2025.

One uncertainty that may impact the sector in the year ahead is tariff policy, given the incoming administration’s proposal to levy new tariffs on all Chinese imports, and given China’s importance as a key consumer of materials. While it can be difficult to make predictions about the ramifications of public policy, especially since outcomes are often quite different than expected, I aim to monitor developments carefully and manage risk accordingly.

Looking for attractive supply-and-demand profiles

Investors can’t predict or control how the U.S. economy will perform in the short term, or how foreign trade policy will unfold. But fortunately, these issues may have little impact on the long-term supply-and-demand dynamics at play in the materials sector.

I have focused on finding areas of the sector with the most favorable supply-and-demand dynamics, and have tended to establish fairly concentrated positions in those areas. One example is copper, whereby in addition to being used in building and construction, copper is a key input in the development of electric vehicles and renewable energy sources, as well as data centers. Each of these areas is expected to potentially see strong demand growth in the coming years.

But copper supply has been challenged for some time now and could become increasingly tight in the years ahead. Several of the major copper mines are aging, and little new supply is coming online.

In the shorter term, performance of copper producers could get a lift from those macroeconomic issues outlined above. China plays an outsized role in demand, so its near-term economic woes have contributed to recent underperformance among copper-related stocks. If China were to see a growth rebound, and the U.S. and European economies could continue to avoid recession, then copper prices could head higher in 2025. But I believe the long-term view for the commodity is strong regardless of which way the short-term economic winds blow.

Elsewhere in the sector, the stocks of chemical firms tend to be highly sensitive to interest rates and, in my view, could rebound from recent sluggish performance if 2025 brings further rate cuts. This industry segment includes both makers of commodity chemicals—meaning chemicals that are standardized and made on a large scale—and specialty chemicals—meaning chemicals that are custom-made for a specific use.

Balancing economic sensitivity with quality

As we get ready to enter 2025, the fund has been positioned with a bias toward cyclicality but not, in my view, overexposure to it. In other words, I aim to achieve performance via a balance of economically sensitive names and what I consider to be the very best of the “all-weather, high-quality" companies in the sector. Going forward, I aim to continue to explore areas of the sector that I believe have the strongest supply-and-demand profiles and that I think could respond well to renewed economic growth.