A robust economic recovery outlook has unleashed a manufacturing boom so far this year, making the backdrop favorable for basic materials stocks. Prices of basic materials have been on the rise, backed by strong demand from industrial activities. Amid this environment, we think investors should bet on companies in the basic materials space that possess strong enough pricing power to combat any downturn caused by rising inflation. We believe under-the-radar basic materials stocks Tredegar Corp (TG), CRH Plc (NYSE:CRH), LyondellBasell Industries (NYSE:LYB), and Vedanta (NYSE:VEDL) possess that characteristic and are worth adding to one’s portfolio now. Let’s take a closer look.The global commodity market is currently on a roll. While basic materials stocks were largely overlooked for much of last year due to global economic weakness, they have rebounded sharply in recent months. Notably, an expected inflationary environment in the United States and the rapid recovery of global industrial activities have been major drivers in pushing commodity prices higher, particularly basic materials.
The basic materials sector includes a wide variety of companies that develop raw materials for other industries, such as manufacturing and mining of chemicals, plastics, construction resources, paper, forest products, packaging products, metals and other minerals. The resumption of industrial operations has been pushing the demand for basic materials to pre-pandemic levels and investors are trading to profit from the flourishing markets. This is evident in the Invesco DWA Basic Materials Momentum ETF’s (PYZ) 29.7% returns so far this year compared to S&P 500 Trust ETF’s (SPY) 12.2% gains over the period.
Rising commodity prices directly influence the profit margins of basic materials companies. Hence, we think betting on relatively overlooked basic materials stocks Tredegar Corporation (TG), CRH Plc (CRH), LyondellBasell Industries (LYB), and Vedanta Limited (VEDL) could be a great way to survive any stock market decline that rising inflation might cause.