Chemical stocks, a “good leading indicator” of global recessions, may have already priced in all of the downturn, Alembic Global Advisors wrote in a research note.
An analysis of historical data shows the chemical sector usually starts to price in a recession four to six quarters before it starts, analyst Hassan Ahmed wrote. Most recently, true to form, “we started to see cracks develop in chemical equities around mid-2018, in-line with past history,” he said.
Ahmed’s analysis showed that over the past 60 years, chemical stocks slumped an average of 28% from peak to trough. The stocks are down about 44% so far in 2020, and are off about 60% from their 2018 peak, signaling that, based on history, “the recent declines are overdone,” Ahmed wrote.
In fact, the S&P 500 Chemicals Industry index saw the biggest quarterly loss in the three months ending today since the 2008 financial crisis, according to data compiled by Bloomberg. The index tumbled about 27% this quarter, coming close to the record 32% decline seen in the fourth quarter of 2008.
Stifel analyst Vincent Anderson has a slightly different take on the selloff. He thinks it’s possible that the current “malaise” is being priced into the chemical stocks, but doesn’t believe that “anything can be truly priced in given the level of uncertainty that remains over the economic impact of this virus.”
However, all is not lost for chemical stocks, Anderson said. There are a few positive signs for the sector, he said, including the possibility of a weaker U.S. dollar, continued fiscal stimulus and low valuation.
From the valuation perspective, Alembic’s Ahmed sees limited risk to “trough valuations” in Air Liquide SA, Braskem SA, Covestro AG, Dow Inc. and Huntsman Corp.
Meanwhile, Morgan Stanley analyst Vincent Andrews said his “preference remains to take advantage of the market sell-off to build positions at the quality end of the sector.” His preferred stocks include, Air Products and Chemicals Inc., Linde Plc and Sherwin-Williams Co.
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