Industrials Sector Report

Sector report by Ed Collins and Shubham Khaitan, 29 January 2021


In this investment report, I recommend that the Fund invests in three ETFs: XTrackers MSCI World Materials ETF, the iShares Commodity Producers Oil & Gas ETF, and the Vaneck Vectors Global Mining ETF. According to our price targets, all three of these ETFs will provide upwards of 10% growth over the next 12 months.

The report breaks down the Materials and Energy sectors, diving in-depth into specific sub-sectors to provide sufficient qualitative and quantitative analysis for our investment recommendations.

Many ETFs in the Mining subsector had large exposures to gold price movements earlier in 2020. Considering the numerous QE programmes by all governments that helped push gold prices up to historic levels, the Vaneck Vectors ETF diversifies away the risk of a subsequent adverse gold price movement by limiting such exposure, whilst still having sufficient exposure to the materials that could benefit from the green-energy push.

As economies rebuild from the pandemic, both developing and developed governments will be focused on infrastructure projects. One just need look at China as well as Biden’s plans. This means a great focus is laid on construction and production materials: spending on which increases manifold post-recoveries, looking at historical empirical data.

Finally, we have confidence that Oil and Gas (O&G) companies will be able to take sufficiently strong stances on ESG considerations to move forward in the right direction, providing great sentiment for investment purposes. O&G companies should be able to use green capital, alongside the oil revenues that will continue for a few years, at least, to fund their transitions. The face of this industry will change, but there will still be plenty of success stories, which we hope the iShares Commodity Producers Oil & Gas ETF will be able to capitalise on.



Figure 1: GICS breakdown of Materials and Energy into their Sub-Sectors

Trends, Themes and Key Sector Drivers:

Performance in the sector is largely driven by supply and demand for building construction in the residential, commercial, and industrial real estate segments.

Many companies in the Materials sector supply most of the materials used in construction. As a result, that makes the companies and their stocks sensitive to changes in the business cycle: historically, and currently, the biggest driver of activity in the Materials sector is the health of the wider economy. When the economy contracts during recessions, as we have seen recently, activity in the Materials sector drops since all companies postpone expansion and investment plans, hence require less of the construction and other materials that the companies in the sector provide. Additionally, if aggregate demand for consumer goods drops, the demand for the raw materials involved in their production also drops.

Monetary and fiscal policy are also key drivers: if there is a lot of government spending on infrastructure projects, for example, this boosts construction in the economy, and hence the demand for materials. Additionally, low interest rates encourage capital spending and investment, which is particularly good for the construction materials sub-sector.

Perhaps above all other sectors, the basic materials sector is subject to the laws of supply and demand.

The fossil fuels, in their unrefined forms, also come under the materials industry. However, in order to incorporate these highly coveted goods with the constraint of only being able to recommend ETFs, we will be branching out into the Energy sector slightly.

The energy sector is an all-encompassing term that describes a complex and inter-related network of companies that are directly and indirectly involved in the production and distribution of energy needed to power the economy. Part of this network are oil and gas producers, who will form part of the focus of this investment report.

General Recent News:

In short, 2020 saw gold do amazingly, and saw Oil go all over the place.

This led to blockbuster years for those involved with gold. Even Warren Buffet wanted to get in on it, with his investment in Barrick Gold Corp.

The pandemic saw oil futures go negative at one point. What followed was a cascade of oil-related bankruptcies, especially in the US, and many of the European oil supermajors cut their dividends, some for the first time since World War 2.

Coming into 2021, gold is still going strong and oil seems to have stabilised around the mid-$50 per barrel range for brent crude.

With the pandemic and political situation still causing uncertainty, it is understandable that gold, often considered a safe asset, is doing well. However, placing a prediction on what may happen with oil and energy is much more difficult.

Products/Services and Key Business Models within the Sector:

Due to the range of companies that are found within the materials sector, there is an unbelievable range of products and services offered. Products offered range from chemicals to construction materials, lumber and packaging.

The business model with all materials companies tends to be quite simple: get the raw material out of the ground, then sell it.

Historical Price Action of Sector Indices:

Figure 2: Price Graph YTD of the S&P 500 Materials Sector Index
(Please click for data)

As we can see, the Materials sector started off 2020 healthy, with the S&P 500 index hovering around the $375 mark. This changed towards the end of February and start of March, when stocks worldwide tanked due to the growing severity of the COVID-19 pandemic leading to many national lockdowns.

Materials stocks bottomed out on the 23rd March and have since improved steadily, with this index reaching a record high on January 13th 2021, at a price of $482.91.

The recovery came as fiscal stimulus measures were agreed, monetary policy started to take hold and economies started to open up more and more out of their virus-induced lockdowns.

The Materials sector, as you can see, has seen considerable growth following the US election result. Investor optimism has been sparked since Democrats historically spend more on infrastructure projects, which benefit materials companies greatly since large infrastructure projects require the construction materials sold by the sector.


Section 1 – Global Mining

2020, despite being a bit patchy at the start for perhaps obvious reasons, turned out to be a great year for companies in the metals & mining sub-sectors.

The iShares MSCI Global Metals & Mining Producers ETF (PICK), the largest ETF for this sub-sector of Materials, reached its highest level since 2014 on the 7th January 2021, when it reached a price of $41.27. This came after the ETF bottomed out at $16.20 on March 23rd 2020, following the start of the pandemic.

The customers of the mining industry are usually businesses and governments: very rarely do individual consumers buy straight from mining companies, they will instead purchase their gold and diamonds from a jeweller.

The Top 40 mining companies are so far weathering the COVID-19 storm mostly unscathed, and certainly better than many other sectors, according to the PwC report “Mine 2020”. In this report, PwC identifies that many governments will appreciate mining as a bedrock of economic recovery in moving out of the COVID-induced crisis.

Chart, line chart, histogram

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Figure 3: PwC graph illustrating the Top 40 Mining Companies’ Financial History  

Due to their strong financials, mining companies were in a very good position to weather the COVID storm: strong balance sheets have allowed them to be resilient to shocks whilst also allowing their flexibility in their responses to economic conditions. These strong financials were established prior to 2020 through consistent revenue growth between 2016 and 2019 as well as prudent capital expenditure.

Although it is not blatantly clear whether or not we have seen the end of the impact of COVID on economic and market conditions, most mining companies managed to maintain fairly strong balance sheets throughout the course of 2020, despite some rewriting the value of assets they own and taking hits on the earnings-front.

Perhaps the biggest weakness for mining companies at this moment in time are ESG considerations, which have not always been mining companies’ strong point. One just has to look at a recent case whereby mining giant Rio Tinto destroyed a number of aboriginal settlements in Australia through mining activities.

Going forward, mining companies should be using their strong balance sheets to focus more on managing their supply chains, focusing on local communities around their operations, and trying to reduce their environmental impact as much as possible.

If mining companies can take advantage of their current financial stability to revisit their strategies, they will be making big strides to ensure the resiliency of their businesses over the long-term. It has been observed throughout 2020 that companies and sectors with strong ESG considerations fare better during periods of volatility and large shocks. If mining companies can collectively improve on this front, investors should look more fondly on the sub-sector. This will make this a great value holding area for the Fund.

Sub-Sector 2 – Oil and Gas

Oil and Gas (O&G), as an industry, is very broad: it covers a whole network of drilling, exploration, production, refining, storage, transportation and more.

The customer base for this area varies massively: despite a movement away from oil and gas in recent times, almost all aspects of business still have a large dependency on it. Individuals, business and governments are all big customers of O&G.

2020 was not kind to oil and gas stocks, with the industry underperforming the broader market. The iShares Oil & Gas Exploration & Production UCITS ETF (SPOG), the largest ETF tracking Oil and Gas equities, fell from a price above 1100GBX to bottom out at 462.05GBX in March of 2020. Since then, there has been some recovery (the price of oil is no longer negative), with the price of the ETF now at 825GBX (as of 28/01/2021), below pre-COVID prices.

Although the O&G industry is used to the highs and lows of economic and price cycles, this downturn seems unlike any other. In fact, some have labelled this downturn the “great compression” of the O&G industry.

The performance of the O&G industry, unsurprisingly, is very dependent on the price of oil. Oil was the worst-performing commodity, falling behind even coal, in 2020. The price of brent crude took a long while to break above the $50 per barrel mark, after dropping below this point at the beginning of March. The price has now seemingly stabilised at around the mid-$50 per barrel mark, but this is still below pre-pandemic levels, when a barrel of brent crude fetched over $60 a barrel.

The result of this year of weak oil prices is that O&G companies did not have the confidence or the capital capabilities to invest with oil at this price range.

Unlike in the past, demand will likely have a larger influence on the future supply-demand balance, and hence price, of oil. The COVID-19 Pandemic has been a “fast-forward” for the industry, with trends that were expected to take years taking place in months. One such trend that has been accelerated is ESG. Again, this has never really been a strong point of the O&G industry. To be successful going forward, companies in the industry will need to form strong stance and commitments on clean energy. A significant reallocation of capital will likely happen toward sectors and companies that generate a measurable, beneficial social or environmental impact alongside a healthy financial return. The O&G industry should be ready to capitalise on this as much as is possible in order to fund its transformation into an industry that will survive in a green-focused world.

It is safe to say that not all oil companies will survive this transition, however, with McKinsey forecasting that we have not quite reached peak oil or gas demand, there are some good years in the medium term for revenues.


Using the S&P 500 Materials Sector Index as a benchmark for the industry, we see the index having these Fundamentals.

S&P 500 Materials SectorTicker: SRMA
P/E (Trailing)P/E (Projected)Price/Cash FlowP/BIndicated Dividend YieldP/Sales 

P/E (Projected) and Dividend Yield are as of Dec 31, 2020; P/E (Trailing), P/B, P/Sales and P/Cash Flow are as of Sept 30, 2020.

We can also see the Fundamentals of the overall S&P 500 index as a benchmark.

S&P 500Ticker: SPX
P/E (Trailing)P/E (Projected)Price/Cash FlowP/BIndicated Dividend YieldP/Sales 

P/E (Projected) and Dividend Yield are as of Dec 31, 2020; P/E (Trailing), P/B, P/Sales and P/Cash Flow are as of Sept 30, 2020.


The global economy and capital markets rebounded faster than expected in the Q3 of 2020 (figures for Q4 are not completely out yet).

However, the pace of recovery in the coming months remains highly uncertain: COVID-19 cases continue to surge amid winter conditions, especially in Europe and the United States, triggering another round of lockdowns and restrictions.

Any return to normality for economic activity largely depends on how the pandemic evolves over the next few months. Perhaps most importantly, COVID-19 vaccines reaching the general public across the world will be the biggest cause for a return to normal activity.

Even when the virus is controlled, economies are expected to continue dealing with the adverse impact of deteriorated fiscal balances, which have occurred whilst governments have propped up consumers and economies through fiscal stimulus, and the effect of muted business investment on the labour market and consumer spending in 2021.

Despite this, once the virus is under more control and economies are able to open up more again, we should see industrial activity pick up again globally, as opposed to being restricted to certain areas, such as China and other Asian economies. This should lead to further demand for materials, and further stabilisation of commodity prices.

On monetary policy: the Federal Reserve will continue to adopt accommodative monetary policy, including no rates hikes until 2023 at the earliest. With firms having this forward-guidance guarantee of low interest rates for the next few years, capital investment projects may be undertaken by many companies. Capital investment picking up would be incredibly beneficial for Materials firms: demand for construction materials, metals, and more will increase.

On a similar note, fiscal spending can often sway the investment performance of Industrials companies. If governments choose to use fiscal stimulus as a way to bring economies out of the COVID-19-induced slump, this could bring big benefits. Governments are often big customers of materials companies. For example, if governments choose to invest in new infrastructure projects, this will lead to some big contracts to provide the construction materials.

On this note, China’s post-pandemic economic recovery and sizeable infrastructure-focused government stimulus increased demand and boosted global metals and mining prices. China both kick-started and fuelled the recovery, with sizeable infrastructure-centric government stimulus, in line with its existing playbook.  This demand is only likely to increase from China as they continue their industrial recovery following the pandemic. This can only provide upside for mining stocks.

Looking forward and on the other side of the world, during his campaign, Joe Biden promised numerous infrastructure projects. When these infrastructure projects start being constructed, demand for materials will also increase. This suggests the potential for large revenues opportunities for materials companies for the next few years.

Similarly, political agendas worldwide may assist the mining sector going forward. Copper, lithium, and other metals are vital to Electric Vehicle production and greener electricity generation. These will see their demand rising in the future, boosted by Biden’s green policies and the European green recovery pledges that introduce tax breaks and purchase incentives for electric vehicles.


Moving forward into 2021, the Materials sector provides a promising outlook.

Our recommended ETFs are sparsely invested in Europe, owing to the continued COVID uncertainty, coupled with scanty material availability. We instead have taken a more global outlook.

Despite some negative sentiment towards the O&G industry, we truly believe that companies within the sector have the time and capital ability to reshape themselves ready for a new world of green energy. Combine this with the years that oil will still provide solid revenues, and this provides good reason for investment.

Recommended ETFs

ETF 1 – XTrackers MSCI World Materials ETF

TickerStock ExchangePrevious Closing Price (27/1/2020)Target Price Range for 12-months’ timeGross Expense RatioP/E TTM
XDWMLSE$49.1$52.64 – $54.460.4%24.52

ETF 2 – iShares Commodity Producers Oil & Gas ETF

TickerStock ExchangePrevious Closing Price (27/1/2020)Target Price Range for 12-months’ timeGross Expense RatioP/E TTM
SPOGLSE844.75p893.93p – 985.94p0.55%8.73

ETF 3 – Vaneck Vectors Global Mining ETF

TickerStock ExchangePrevious Closing Price (27/1/2020)Target Price for 12-months’ timeGross Expense RatioP/E TTM

The Global Mining and World Materials ETFs are Growth opportunities for the fund due to their larger P/E ratios.

Meanwhile, the Oil & Gas ETF provides a good value opportunity for the fund, due to its smaller P/E ratio and historically solid dividend payments.

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