US chemicals stocks poised to benefit in high interest rate environment – Fermium

NEW YORK (ICIS)–US chemicals equities are set to benefit in a rising interest rate environment as this typically reflects a strong economy and inflation, according to one Wall Street analyst.

“Looking back over the past 30 years suggests rising interest rates are beneficial for our sector. Conceptually, this makes some sense as interest rates should be reacting to a heating up of the economy as well as inflation. Basic materials ought to favourably participate from both,” said Frank Mitsch, analyst at Fermium Research, in a research note.

Of eight time periods when the 10-year Treasury yield rose by over 1 percentage point, US chemicals stocks outperformed the broader market as measured by the S&P 500 in six of these periods (75%), he added.

The most notable periods of outperformance when this happened also coincided with strong GDP growth or major reversals from declining GDP – October 1993-November 1994, December 2008-April 2010 and most recently March 2020-February 2021, the analyst noted.

“Benefits to chemical companies in these periods are tied to better economic activity and higher inflation. While the financials sector has been long been touted as one of the rising inflation-resilient sectors, we believe chemical equities ought to lead to outperformance in these periods, as well,” said Mitsch.

The analyst’s top picks for 2022 are Westlake Chemical, Huntsman and ag chemicals and seed genomics company Corteva.

For the upcoming Q4 earnings season, Fermium sees solid sales and earnings largely coming in line with expectations.

“We sense that most of our companies have gotten a better grasp on televising, and in some scenarios, mitigating, the ongoing costs/raws inflation and supply chain mishaps over the last few months,” said Mitsch.

“Following this recent wave of COVID-19 cases, dare we say, we feel more comfortable with our expectations surrounding the Q4 swing factors including impacted workforces, logistical hiccups, and the other ubiquitous impacts following the Omicron surge,” he added.

On average, the analyst expects US chemicals company sales to be up around 25% year on year in Q4, including from M&A impact.

Focus article by Joseph Chang