FREE

Mat-Chem Notes

WTR-CMI in 2023. With the majority of stocks in our index finishing the year in positive territory, the WTR-CMI Index managed to keep pace with the Russell 2000, appreciating 15%. However, both indexes fell well short of the 24% growth of the S&P 500 in 2023, with the WTR-CMI Index dragged down by four companies that lost more than 50% in value during the year. Weak demand and destocking. Looking back at 2023, several themes are emerging as we head into 2024, such as declining commodity prices and weakening end-market demand, with Y/Y volume comps affected by destocking across several end-markets since mid-year, as supply chain constraints, which characterized 2022, are resolved and companies go back to just-in-time inventory management. Proximity to consumer. Companies in our index with direct exposure to consumer markets, such as architectural paints, adhesives, and sealants, as well as consumer-driven end-markets such as automotive, dining, and hospitality, have performed well this year on both a relative and absolute basis, and in many cases, have outperformed the S&P 500. As prices of raw materials, the main cost input for such companies, continue to decline while company selling prices remain sticky, margin expansion may help offset volume declines, suggesting relative outperformance of such stocks may continue in 2024. Companies such as SHW, RPM, ECL, FUL, AXTA, and PPG may benefit from these trends. Aerospace & defense. In addition to the automotive end-market, aerospace and defense markets are also seeing strong demand and do not seem to be affected by the destocking trends in other segments. With the US and NATO committed to supporting Ukraine in its war with Russia and now with the Israeli-Palestinian conflict heating up, defense spending is likely to remain a bright spot and, along with the ramp-up in demand from aerospace, companies in our index with exposure to these markets, such as HXL, PKE, and MTRN, may continue to outperform as we head into 2024. Lithium and ag-chem may continue to struggle. The precipitous decline in lithium (and other battery metals) prices following the supply chain-related price spike of 2022 has been mirrored in ag-chem markets as well and with inventory levels still high and end-market demand uneven, lithium and ag-chem stocks may remain under pressure well into 2024.