Wells Fargo’s brokerage, investing and financial advisory division highlights one S&P 500 sector that could serve as a defensive investment as some stock prices reach inflated levels.
Wells Fargo Advisors He says It received a “positive” rating in the materials sector because “a combination of cyclical and secular forces are lining up to improve” the sector’s outlook. The materials sector includes industries such as containers, packaging, chemicals, metals and mining, in addition to building materials.
According to Wells Fargo Advisors, the U.S. materials sector “offers defensive attributes that could help reduce the near-term risk of accelerating inflation in equity portfolios” and could become more attractive to investors in the future.
“The materials sector has significant international exposure, and we view current US global trade policy and tariffs as a net benefit to the sector as a whole. Although some companies face risks associated with tariffs, many high-quality materials companies have diversified their global operations which is helping to limit the negative impacts of tariffs, while other companies (such as steel producers) are the direct beneficiaries of tariffs.”
Additionally, a renewed focus on domestic supply chains creates additional demand and opportunities for expansion in the United States.
Regarding subsectors within the materials sector that are particularly attractive to investors, Wells Fargo says industrial gases, specialty chemicals and construction materials currently offer “strong quality characteristics.”
“For industrial gases, we are attracted to high margins, consistent pricing power, and widely diversified end-market demand.
Our view is that the building materials subsector should benefit from the strength of infrastructure and heavy non-residential construction (including data centres), where competition within the industry is limited.
In the specialty chemicals space, we believe that most companies have the ability to maintain strong margins throughout cycles due to sticky customer relationships and their ability to deliver a unique value proposition.
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