4 Surprising Chemical Stocks To Buy Now

After bearing the brunt of the global economic crisis, the highly cyclical $5 trillion global chemical industry is on the slow road to recovery amid a still-fragile macro environment. Although, the chemical industry fared reasonably well in the second quarter of 2015 helped by strength across automotive and residential construction markets, it remains challenged by soft agriculture market fundamentals, depressed demand in energy markets, sluggishness in China and a stronger greenback.

Economic cooling in China, which is a major market for chemicals, remains a deterrent over the near term. China’s GDP rose 7% in second-quarter 2015, representing the weakest pace in the last 6 years. The country’s economy is expected to slow even further this year in comparison with the prior year as the official GDP growth target for 2015 has been pegged at 7%.

The preliminary Caixin China manufacturing purchasing managers’ index (PMI) for September fell to a six-and-a-half-year low of 47.0. This compares with a final reading of 47.3 in August. A reading of less than 50 indicates contraction in manufacturing activity. This recent spate of disappointing data has raised concerns around the health of China’s economy, which in turn has cast a dark shadow over the chemical industry.

Outlook for Europe also remains cloudy. The eurozone economy is stuttering, with meager growth of 0.3% in the second quarter of 2015. Chemical makers in the European Union remain affected by lower prices and sluggish demand. Chemical prices, which fell 1.8% in the European Union last year, remain under pressure.

Lower oil prices are hurting demand for chemicals in the energy space, an important end-market. Depressed crude oil prices will continue to keep chemical prices under check as they essentially move in tandem with oil prices.

These headwinds apart, the chemical industry will improve on the back of a gradually improving U.S economy. According to the American Chemistry Council (ACC), an industry trade group, U.S. chemical production will expand both this year and next, and the American chemical industry will eventually transcend the nation’s overall economic growth and emerge as a long-term growth engine as improvements in key end-use industries and emerging markets take hold.

The shale revolution has incentivized a number of chemical companies to invest billions of dollars to ramp up capacity in the country. The automotive sector is witnessing significant momentum and is reaping the benefits of low gasoline prices. Chemical makers are expected to gain from higher demand from this important end-market.

Recovery across housing and commercial construction, another major chemical end-market, has been one more supporting factor for the chemical industry’s recovery. The US Architecture Billings Index (ABI), an economic indicator that provides approximately nine-to-twelve-month glimpse into the future of non-residential construction spending activity, remained over 50 for most of the recent months. Any score above 50 indicates an increase in billings.

Moreover, the American Institute of Architects (AIA) expects non-residential construction spending to go up nearly 8.9% in 2015 and 8.2% in 2016. This bodes well for chemical demand in the construction markets.

Within the Zacks Industry classification, the chemical industry falls under the broader Basic Materials sector (one of 16 Zacks sectors). We rank all of the more than 257 industries in the 16 Zacks sectors based on the earnings outlook for the constituent companies in each industry. This ranking is available on the Zacks Industry Rank page.