Stars are aligned for chemical stocks in 2021. The current setup for the sector looks quite good to us based on a plethora of positives: ongoing economic recovery, the ramp in vaccinations, incremental stimulus efforts, crude oil prices creeping higher, widespread destruction of commodity chemical supply, modest yield curve steepening, and a weaker USD. These factors suggest that investors with ample exposure to the sector are likely to be rewarded, as has been the case since late March 2020 when we warmed up the group. Indeed, our analysis suggests that 2021 could shape up to be similar to 2010, a year when chemical stocks performed well in both absolute and relative terms. Key risks in our view include rapidly rising raw material costs and potential for rolling regional lockdowns (e.g. UK) that could create an uneven recovery dynamic of “two steps forward, one step back”. Likewise, talk of higher tax rates could gain traction at some point, while a sustained surge in interest rates could also catalyze a correction, although perhaps not under-performance in relative terms. While absolute valuation levels appear to be extended, relative valuation remains appealing to us given (A) early-stage economic recovery; and (B) substantial destruction of supply. On balance, we maintain a healthy appetite for risk with a tactical tilt toward commodity-linked exposure.
- Huntsman Corporation (HUN)