Two European Chemicals companies, $AKE.PA (Arkema) and $CLN.ZU (Clariant AG), were added to the portfolio last week.

The two had made an appearance in the portfolio in October, but were sold around the US Presidential election due to the fear they might be affected negatively by tariffs.

A month after the election, I decided to add them back to the portfolio because their prices had declined and some calendar time had passed since the election, giving the market time to digest the impact of potential tariffs on the companies.

Fundamentally, the medium-term investment case for both companies looks interesting.

The European Chemicals industry has undergone a tough past few years. First Russia invaded Ukraine. The war increased European gas prices, hurting European Chemicals companies’ competitiveness because gas is an important input in chemicals production. Then interest rates went up. The higher rates reduced the demand for cars and construction, both important end markets for Chemicals companies.

It is perhaps not surprising, then, that Arkema and Clariant shares trade at or below 2019 levels. In the past year their shares have fallen 20%. The weak backdrop for the Chemicals industry has compressed the two companies’ valuations to 9 and 11 times forward earnings, compared to an average of 12 and 16 times, respectively.

The investment case for Chemicals companies is that interest rates are going down, which could boost demand for cars and construction. Gas prices could fall if Trump manages to engineer a peace deal in Ukraine. Finally, Chemicals could benefit if Chinese stimulus finally gains traction.

Chemicals are the kind of contrarian play I like to invest in. The companies are suffering from many negatives – weak economies in Europe and China, high gas prices, tariffs – but their share prices are also low. If there is any improvement in the sector backdrop, the sector could recover strongly.

We have to be mindful of risks, too. If tariffs turn out worse than expected, or if the European or Chinese economies weaken further, that would pressure cyclical companies such as Arkema and Clariant.

I am happy to hold the shares because my view is that there is going to be a reversal of current US-led performance trends at some point in 2025.

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@triangulacapital +29.2%
SWDA.L +23.3%

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NN Group was sold, Clariant and Arkema were bought.