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Materials: Looking for long-term potential

Key takeaways

  • Materials are a cyclical sector, meaning the stocks generally rise and fall with global growth prospects.
  • Concerns over global recession risks could continue to weigh on the stocks in 2023, but the sector has historically performed well during cyclical recoveries.
  • That said, the sector still holds a number of potentially compelling long-term opportunities, including copper miners and chemical manufacturers.

In the past year, and likely in the coming year, the main force driving the materials sector has been recession worries.

However, there are attractive pockets of potential long-term opportunity in the sector—such as among firms that stand to benefit from the long-term transition to electric vehicles. For such long-term trends, the market's downturn of the past year has presented some potential buying opportunities.

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Riding a slowing global growth outlook

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).

Demand for those goods tends to be highly dependent on the state of the broader economy. For that reason, materials are inherently a cyclical sector—meaning they tend to boom and bust in step with the broader economy. The end market for materials is generally global in nature—one ton of copper mined in Canada could be sold in North America or shipped to Asia. That means the stocks react not only to US growth prospects but to global growth prospects.

Chart shows 2022 year-to-date performance for the materials sector and for the S&P 500.  As of December 9, materials sector stocks had lost 9.13% at the index level, compared with the S&P 500's 16.17% loss year-to-date on a total return basis.
Past performance is no guarantee of future results. Materials sector performance is represented by the S&P Materials Select Sector index. Data as of Dec. 9, 2022. Source: S&P Dow Jones Indices, a division of S&P Global.

In the past year, the confluence of global growth worries weighed on the materials sector. While the US economy remained surprisingly resilient during 2022, there's no question that growth has slowed and recession risks for 2023 have risen. China's repeated COVID-related lockdowns weighed on the country's growth, as has its weak property market. And parts of Europe seem already to be tipping into recession, as a result of rising food and energy prices due to the war in Ukraine.

While these headwinds are likely to persist into the coming year, some specific materials segments have still been showing strong long-term fundamentals.

The early stage of a long-term story for copper

Take copper, for example. The metal's price declined considerably in 2022 on growth concerns related to a potential global slowdown and China's COVID policies. Yet, the long-term supply-demand picture for copper looks compelling, as the metal is a play on a powerful trend that is still in its early stages: "the electrification of everything." Notably, electric vehicles (EVs) use significantly more copper than vehicles with internal combustion engines.

Table shows mineral usage of electric cars versus conventional cars. According to estimates by IEA, electric cars use about 53.2 kilograms of copper per vehicle on average, compared with 22.3 kilograms for conventional cars.
Source: IEA 2022; "Executive summary: The role of critical minerals in clean energy transitions," License: CC BY 4.0.

Recent portfolio holdings in line with this investment thesis include Canada-based First Quantum Minerals (), which operates copper mines in North America, Europe, Africa, and Australia, and US-based Freeport-McMoRan (), which operates mines in the US, Chile, Peru, and Indonesia. Both companies have generally low cost structures.

Long-term opportunity amid a short-term slowdown

Similarly, certain parts of the commodity chemicals group could have compelling long-term potential despite the short-term growth slowdown.

This segment includes chemicals that are made on a large scale and that act as intermediates to produce other chemicals—which, in turn, are used to produce an extensive range of end products, including construction materials, adhesives, plastics, apparel, and tires.

Demand in the group tends to be sensitive to broader economic trends. While the growth outlook for 2023 is uncertain, the longer-term outlook—like for the next 3 to 5 years—looks more constructive. If the economy eventually improves, as the pandemic continues to recede and global economies recover from the current slowdown, producers of commodity chemicals could see rising demand for their products.

Moreover, short-term supply constraints for these products could drive attractive pricing dynamics. The war in Ukraine has pushed up feedstock and energy costs for chemical producers in Europe, putting them at an increased disadvantage compared with competitors outside of Europe. And capacity growth could decelerate in the US in coming years. Recent portfolio holdings that could potentially benefit in this environment include LyondellBasell Industries (), Westlake Corp. (), and Huntsman Corp. (), all of which are US producers of a wide range of chemicals.

Fund top holdings*

Top-10 holdings of the Fidelity® Select Materials Portfolio () as of October 31, 2022:

  • 15.4% – Linde PLC ()
  • 6.2% – Freeport-McMoRan Inc. ()
  • 5.9% – Air Products & Chemicals Inc. ()
  • 5.1% – Sherwin-Williams Co. ()
  • 5.0% – Corteva Inc. ()
  • 4.7% – CF Industries Holdings Inc. ()
  • 4.5% – First Quantum Minerals Inc. ()
  • 4.0% – Ecolab Inc. ()
  • 3.8% – Albemarle Corp. ()
  • 2.8% – Dupont de Nemours Inc. ()

(See the most recent fund information.)

On the lookout for supply-demand imbalances

In addition to those broader themes, other unique opportunities could arise in the sector. Among the various industries and sub-industries within the materials sector, supply-demand dynamics can at times be thrown into stark imbalance—presenting potential opportunity for savvy investors.

While 2023 may bring continued challenges for markets and materials in the big picture, there still may be some positive long-term stories for investors willing to dig deeper.

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Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully. * Any holdings, asset allocation, diversification breakdowns or other composition data shown are as of the date indicated and are subject to change at any time. They may not be representative of the fund's current or future investments. The Top Ten holdings do not include money market instruments or futures contracts, if any. Depository receipts are normally combined with the underlying security. Some breakdowns may be intentionally limited to a particular asset class or other subset of the fund's entire portfolio, particularly in multi-asset class funds where the attributes of the equity and fixed income portions are different. Under the asset allocation section, international (or foreign) assets may be reported differently depending on how an investment option reports its holdings. Some do not report international (or foreign) holdings here, but instead report them in a "Regional Diversification" section. Some report them in this section in addition to the equity, bond and other allocation shown. Others report international (or foreign) holding as a subset of the equity and bond allocations shown. If the allocation without the foreign component equals (or rounds to) 100%, then international (or foreign) is a subset of the equity and bond percentage shown.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

References to specific securities or investment themes are for illustrative purposes only and should not be construed as recommendations or investment advice. This information must not be relied upon in making any investment decision. Fidelity cannot be held responsible for any type of loss incurred by applying any of the information presented. These views must not be relied upon as an indication of trading intent of any Fidelity fund or Fidelity advisor. Investment decisions should be based on an individual's own goals, time horizon, and tolerance for risk. This piece may contain assumptions that are "forward-looking statements," which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

Past performance is no guarantee of future results.

Investing involves risk, including risk of loss.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Because of its narrow focus, sector investing tends to be more volatile than investments that diversify across many sectors and companies. Sector investing is also subject to the additional risks associated with its particular industry. The materials industries can be significantly affected by the level and volatility of commodity prices, the exchange value of the dollar, import controls, worldwide competition, liability for environmental damage, depletion of resources, and mandated expenditures for safety and pollution control. The S&P 500® Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent US equity performance. The S&P Materials Select Sector index comprises those companies included in the S&P 500 that are classified as members of the materials sector, with capping applied to ensure diversification among companies within the index.

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