Materials have had a sluggish, if positive, year in 2024—held back by ongoing worries about the strength of the US 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 US 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 US and globally.
In 2024, this sensitivity generally hampered the sector. Although the US 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.
Performance in the sector ticked up in the second half of the year as investor confidence grew that the Fed would be starting a series of rate cuts. This put materials on track for a potentially positive, if lagging, year.
2025: Watching policy and the economic cycle
After a painful period of rate-tightening, the US 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 US 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.
In managing Fidelity® Select Materials Portfolio (
Fund top holdings1
Top-10 holdings of the Fidelity® Select Materials Portfolio (
- 17.4% – Linde PLC (
) - 8.3% – Ecolab Inc. (
) - 7.0% – Air Products and Chemicals Inc. (
) - 4.2% – Corteva Inc. (
) - 3.7% – Dow Inc. (
) - 3.5% – Freeport-McMoRan Inc. (
) - 3.5% – Nucor Corp. (
) - 3.3% – Axalta Coating Systems Ltd. (
) - 3.0% – The Chemours Company (
) - 3.0% – AptarGroup Inc. (
)
(See the most recent fund information.)
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 US 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.
Several Canadian companies, including Vancouver-based Teck Resources (
Elsewhere in the sector, the stocks of chemicals 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. Recent fund holdings that have illustrated this thesis include Tronox Holdings (
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.
An example of the latter has been an overweight stake in Linde (
Going forward, I aim to continue to explore areas of the sector that I believe have the strongest supply-and-demand profiles, and which I think could respond well to renewed economic growth.
Ashley Fernandes is the Natural Resources sector leader and a portfolio manager in the Equity division at Fidelity Investments. Fidelity Investments is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing, and other financial products and services to institutions, financial intermediaries, and individuals.
In this role, Mr. Fernandes provides research coverage for the global integrated energy and global mining companies and he manages the Fidelity Natural Resources Fund. He is also a member of Fidelity's Stock Selector Large Cap Group and is responsible for managing the energy and materials sleeves for various diversified sector-based portfolios. Mr. Fernandes is also responsible for co-managing the Fidelity and Fidelity Advisor Balanced Funds, VIP Balanced Portfolio, Fidelity Select and VIP Materials Portfolio, and Fidelity Advisor Materials Fund. Additionally, he co-manages both the global energy and global materials sector sleeves of the FIAM sector portfolios.
Prior to assuming his current role, Mr. Fernandes worked as a global energy analyst for Fidelity International Limited (FIL) in London from 2008 to 2013. In this capacity, he was an analyst for the U.S., Canadian, European integrated, and emerging-market energy sectors, as well as small- and mid-cap international exploration and production (E&P) companies.
Before joining Fidelity in 2013, Mr. Fernandes worked as an associate in Private Equity. He has been in the financial industry since 2001.
Mr. Fernandes earned his bachelor of commerce degree, with honors, from Queen’s University, and his master of business administration degree from London Business School. He is also a CFA® charterholder.