Wells Fargo’s brokerage, investment and financial advisory division is highlighting one S&P 500 sector that could act as a defensive investment as some stock prices reach too high levels.
Wells Fargo Advisors say that it has a “favourable” rating for the materials sector as a “combination of cyclical and secular forces are aligning to improve the sector’s prospects”. The materials sector includes industries such as containers and packaging, chemicals, metals and mining, as well as construction materials.
According to Wells Fargo Advisors, the U.S. commodities sector offers “defensive characteristics that could help reduce the near-term risks of accelerating inflation for equity portfolios” and could become even more attractive to investors in the future.
“The Materials sector has high international prominence, and we view current U.S. global trade policies and tariffs as a net benefit to the sector as a whole. While some companies face tariff-related risks, many high-quality Materials companies have diversified their global operations that are helping to limit negative tariff impacts, while others (such as steelmakers) are direct beneficiaries of tariffs.
Additionally, the renewed focus on domestic supply chains creates additional demand and opportunities for U.S. expansion.”
On the subsectors within the materials sector that are particularly attractive to investors, Wells Fargo says industrial gases, specialty chemicals and building materials currently offer “strong quality attributes.”
“In industrial gases, we are attracted to the high margins, consistent pricing power and broadly diversified end-market demand.
We believe that the Construction Materials subsector should benefit from strong infrastructure and heavy non-residential construction (including data centers), where competition within the sector is limited.
At Specialty Chemicals, we believe that most companies are able to maintain strong margins throughout the cycles, thanks to their close customer relationships and their ability to deliver a unique value proposition.”
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