Slowdown in demand in China — the world’s biggest consumer of commodities — amid the coronavirus outbreak cast a pall over several industries in the Basic Materials space for much of the first half.
Commodities have been among the worst hit since the deadly virus started spreading across the globe. Fears that a possible hard landing of China’s economy amid the pandemic would kill the country's appetite for raw materials triggered a selloff in most commodities during the first quarter. Some of the major industries in the Basic Materials space such as chemicals and steel have been walloped by the virus-led demand destruction.
However, with China seeing an economic rebound, things are looking up for the Basic Materials sector in the second half of the year. China is clawing back from the coronavirus-induced slump as industrial activities picking up pace following easing of lockdown measures.
China’s economy returned to growth in the second quarter after a sharp contraction in the first quarter. China’s GDP grew 3.2% year over year in the second quarter, aided by strong industrial production that rose 4.4% year over year in the quarter, according to China's National Bureau of Statistics.
Notably, the coronavirus outbreak had a devastating effect on China’s economy in the first quarter. China’s GDP shrank 6.8% year over year in the first quarter, the first contraction in decades, as lockdown restrictions hurt industrial production and retail sales.
Meanwhile, after declining in the first quarter, China’s manufacturing activities picked up in the last three months on a recovery in domestic demand and Beijing’s efforts to mitigate the impacts of the pandemic. China’s official manufacturing purchasing managers’ index clocked at 50.9 in June, up from 50.6 in May. A reading above 50 indicates expansion in activity.
Business activities in the construction sector also gathered momentum in June. China’s automotive sector has also rebounded from the crisis wrought by coronavirus as government stimulus and attractive discounts from automakers helped revive consumer demand.
Government stimulus are likely to rev up China's economy in the second half. Beijing is looking to stimulate the economy with big infrastructure spending and is also taking steps to boost domestic consumption. China has unveiled a roughly $500 billion stimulus focused on tax cuts, infrastructure projects and job creation to get the economy back on track. The economic recovery in China is expected to continue in the coming quarters on further improvement in domestic demand and government support.
Meanwhile, gold has been the bright spot in the Basic Materials space this year as fears over the coronavirus pandemic made it the most attractive safe-haven asset. Gold prices gained around 13% in the second quarter — the biggest quarterly percentage increase in more than four years.
Notably, gold crossed the $1,800-an ounce mark on Jun 30. Global uncertainty over the coronavirus pandemic, the low interest rate environment, renewed U.S.-China tensions and the civil unrest in the United States are among the factors that have contributed to bullion’s rally.
Also, copper prices have witnessed a rally throughout June. Factors like optimism over financial stimulus, strong demand in China (a top consumer) and concerns over supply disruption from top producer Chile due to the worsening coronavirus situation in that country are driving copper prices. Prices of the red metal were up roughly 25% in the second quarter. Notably, the widely-used industrial metal took a beating in the first quarter amid plunging oil prices and a slowdown in demand in China due to virus-led containment measures.
5 Materials Stocks Worth a Bet Now
Increased stimulus from the China government and efforts to boost domestic consumption are likely to help the world’s second-largest economy advance steadily moving ahead. A recovery in demand in China would also augur well for the Basic Materials sector.
Amid this backdrop, a sneak peek at the space for some potential winners could be a great idea for investors looking to gain from the second-quarter earnings season.
We highlight the following five stocks, with a solid Zacks rank, that are worth considering for investment right now. Our research shows that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer good investment opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.
Vale S.A. VALE
The Brazil-based iron ore producer sports a Zacks Rank #1. The company has an expected earnings growth of 81.8% for the second quarter. Over the last 60 days, the Zacks Consensus Estimate for its second-quarter earnings has gone up 73.9%. The stock is also up 42% over the past three months.
Green Plains Inc. GPRE
The Nebraska-based ethanol producer, carrying a Zacks Rank #1, has an expected earnings growth of 36.3% for the second quarter. Moreover, it has an expected earnings growth of 52% for the current year. The company also delivered an earnings surprise of 23.1%, on average, over the trailing four quarters. Moreover, its shares have surged around 134% over the past three months.
Eldorado Gold Corporation EGO
The Canadian gold and base metals producer carries a Zacks Rank #2. The company has an expected earnings growth of 2,100% for the second quarter. It also has an expected earnings growth of 1,850% for the current year. The company’s shares have also gained around 32% over the past three months.
Sandstorm Gold Ltd. SAND
The Canada-based gold royalty company carries a Zacks Rank #2. It has an expected earnings growth of 300% for the second quarter. The stock also has an expected earnings growth of 55.6% for the current year. The company has also seen its shares rally around 46% over the past three months.
Wheaton Precious Metals Corp. WPM
The Canada-based mining company has a Zacks Rank #2. It has an expected earnings growth of 100% for the second quarter. The stock also has an expected earnings growth of 62.5% for the current year. The company’s shares are also up around 39% over the past three months.
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