Conference Insights: Thoughts from our annual Global Industrials, Materials & Building Products Conference
The commentary from Deutsche Bank’s Global Industrials, Materials & Building Products Conference reveals a stabilizing demand environment amid economic uncertainty. Per the full note source, key sectors, especially data centers and utilities, continue to experience robust growth despite a cautious consumer backdrop. Notably, companies tied to consumer spending have not seen the expected seasonal recovery, underscoring potential headwinds for domestic consumption as weather patterns impact demand. With ongoing debates over U.S. economic policy and tariffs, market participants should be informed of how these themes may influence foreign exchange movements, particularly if consumer sentiment weakens further.
What the desk is arguing
The desk interprets the findings from Deutsche Bank’s recent conference as indicative of a divergent trajectory between growth sectors and consumer-related businesses. The insights provided by the attending executives signify a sustained confidence in industrial growth amidst broader economic constraints.
Evidence from the conference highlights that demand remained stable through early summer, with increasing growth in specialized sectors such as commercial HVAC and power utilities. This bifurcation suggests a differentiated risk profile in the industrial space as opposed to the consumer-driven sectors, which remain subdued.
Where it sits in our coverage
Current consensus from our coverage indicates a target of 1.075 for the relevant currency pair, with a spread between 1.04 and 1.12. Notably, jpmorgan has aligned its forecast at 1.10 for Mar-26, while bofa maintains a contrary stance at 1.04 for the same tenor.
The desk’s analysis aligns closely with the consensus outlook, placing our views near the mid-to-upper range of the established targets, particularly in light of the consumer sentiment data that may drive market volatility.
How other firms see it
In the current landscape, firms such as jpmorgan exhibit alignment with the desk’s bullish perspective, anticipating continued industrial strength. Conversely, bofa expresses caution regarding consumer exposure, reflecting a more bearish sentiment regarding overall economic growth.
As the consumer confidence index trends downward, monitoring USD/CAD will be crucial, as its trajectory may respond sharply to shifts in U.S. economic indicators and Fed policy adjustments.
01Stable demand trends observed across key industrial sectors
02Growth remains solid in data centers, utilities, and HVAC
03Consumer-facing companies are experiencing weaker seasonal demand
04Weather and economic policies adding layers of complexity to recovery
Market implications
Watch for signals in USD/CAD as shifts in consumer sentiment may prompt volatility ahead of key data releases later this quarter. A sustained decline in consumer confidence could lead to adjustments in FX positioning.
Risks to this view
A significant catalyst for reversal would be a marked improvement in consumer sentiment or unexpected fiscal policy changes that bolster domestic spending. Such developments could challenge the industrials' resilient narrative and alter growth projections.
Podzept, the podcast from Deutsche Bank Research, with interviews on current economic and financial topics. Listen as economists and analysts from Deutsche Bank present their views. Welcome.
You are listening to another episode of Podzept, the series where we discuss some of the best ideas coming out of Deutsche Bank Research. My name is Matt Barnard, Director of U.S. Equity Research.
Here at DB, we are in the midst of our very busy early summer conference season, and right in the middle of it all was our industrials conference we hosted in New York this week. Given everything going on with regards to U.S. economic policy, tariffs, the reshoring of U.S. manufacturing and consumer demand, this conference was very well-timed to get updates from some of the companies and industries who are at the center of it all. To help us unpack the key themes discussed at the conference, with me today are Nicole DeBlaise, David Begleiter, Colin Brown, and Andrew Krill.
We have a lot to get to, so let's jump right in. Nicole, you have a very diverse group of companies that attended the conference in the multi-space. What were some of the key takeaways from your meetings?
Yeah, sure. Thanks, Matt. So I'll probably go through four high-level takeaways of themes and what we learned at the conference.
So I think first, demand trends broadly are still stable through April and May. And I think when you kind of unpack and look through the end markets, our companies span about 35 different end markets. Those with secular growth themes are still contributing the highest growth.
So very bullish commentary around data centers, power and utility, and commercial HVAC, which have been leaders among the end markets from a growth perspective for some time now. The consumer, however, remains cautious, and companies exposed to the consumer are not observing a normal seasonal pickup in these areas. Weather has also been an impact there.
And I think after listening to what companies have said, it's still unclear whether we are seeing a benefit from any sort of tariff pre-buy. But in my view, it's logical to assume that there's some magnitude of this happening. It's just hard to tell while you're in the moment.
Second takeaway is despite tariff de-escalation, most of the group is still raising price as they have planned to do at the time of 1Q earnings when the China tariff was 145%. It's since gone back to 30. And despite this, companies are still putting through the price increases that they had planned with the view that the tariff situation is still fluid.
We're not sure how things might change post early July. And there's also concerns around incremental indirect cost increases, things like the additional 50% tariff on steel. That said, I think that companies that had planned second price increases in the summer may not implement those.
Depends again on what happens in early July. Third thing is tariff costs are potentially coming down. Pricing remains unchanged.
And so could there be the potential for margins to improve relative to expectations? I think that could be on the table. We'll kind of, again, have to see what happens in July and how policy develops from here.
And then fourth, investors are still very, very focused on names with idiosyncratic narratives. And the reason for that is macro uncertainty remains extremely high. And so most of the questions that we field and the greatest interest in the stock specific stories are around those that have margin improvement potential, secular growth opportunity and capital allocation, which has been kind of the theme that we've seen in this group for the past year or two.
And I'd say that those were key themes during our meetings as well. So I'll turn it back to you, Matt. Sure.
And certainly we don't know how these tariffs will play out. But if the administration moves to more industry specific tariffs through sections 232 or 301, that could impact some costs more than others. So if blended tariffs potentially come in a little bit less than feared, how do you think that plays out to margins?
Because as you said, some of these companies are taking price, but maybe the costs aren't going to be going up at the same rate. Can they hold this price and maybe benefit margins over time? I think so.
I mean, my group is, there's obviously pockets, right? We cover 35 different end markets. It's not homogenous here.
And there's exceptions to almost every rule you can think of when you cover multi-industry and electrical equipment. But I think this is a group that generally tends to hold list price increases that they make. The general approach to tariffs has been list price increases rather than surcharges.
And so if at the end of the day, China tariff sticks at 30%, then I think a theme we could see coming out of second quarter earnings season is perhaps margin forecasts need to move up because the price cost equation has improved. Great. That makes a lot of sense.
And Begleyer, let's move over to, you had nearly 20 chemical companies at the conference, though the overall tone seemed a bit dour with no real pickup in demand. Can you walk us through some of your key takeaways? Yeah, thanks, Matt.
Exactly. Some of the key themes were lack of any meaningful demand improvement, continued weak durable goods demand, a very disappointing spring construction season, and increased caution by customers leading to delayed and smaller orders. Now this very challenging manufacturing environment has been in the space now for three years.
Overlay trough conditions in most commodity chemical chains, as challenging environment for U.S. chemicals as I've seen in over 20 years covering the space. The result has been investor sentiment is at levels I've not seen in over a decade since the 09 downturn. Enterprises are depressed, interest in these names is low.
And that's actually, and that's a good news because I like it when their sentiment is low and as my companies always say, all cycles turn, and when this cycle turns, it should be pretty strong. That said, there are some structural headwinds we have here, mainly supply, new supply in the Mideast and China. So we shall see, but there's another downbeat conference for U.S. chems with really no visibility on improvement in the DAC half of the year.
Right. But so all cycles can and usually do turn, but a three year downturn seems to me a bit more secular versus cyclical. I mean, how are you seeing that play out?
So that is very fair. So two things. We have China adding capacity on a goal to self-sufficiency.
In the past, their growth in the country kept a lot of their product in country. As their growth has slowed, they have not slowed their manufacturing. They run many of their plants in the chemical chain below cash costs to maintain full employment and meet five-year plans.
So they are pumping more product out to the U.S. and Europe. That's been a problem. We're now seeing responses from the Europeans and U.S. government to the tariffs.
Plus you have Middle East still at the low cost region to make chemicals and a more supply. So slowing global growth, especially Chinese growth, continued investment in Asia. So again, you look at the commodity guys, they will not get back to peak conditions until sometime next decade.
That said, there's still plenty of pent-up demand in oils and housing and construction where a number of U.S. chems can benefit and play. Okay. Got it.
Colin, let's pivot over to you. What did you pick up from your building and building product supply companies at the conference? Yeah.
So the conference really revealed a consistent narrative from what companies were talking about in their first quarter earnings. It's a soft residential market, particularly after a disappointing spring selling season. Most builders are slowing their starts and build pace and April sales trends were pretty volatile.
Probably the one positive comment that came out of residential demand was multifamily. Could it be finding a bottom here? We heard companies talking a little bit more about their bidding activity picking up in the multifamily side of the business after it's been down for a couple of years, just given the normalization after a strong couple of years post-COVID.
On the repair and remodel side for residential, which is tied to things like home equity, consumer confidence, and existing home turnover, things continue to be weak there. We've had several years of lower repair and remodel sales broadly. So companies are really starting to talk about pent-up demand on the building product side when the cycle does begin to turn, particularly on some of the large ticket projects like flooring.
While residential has been weak, commercial and industrial end markets are proving to be more resilient. So far, heavy non-res is really the driver here. This includes things like data centers and really the order books for companies are building there.
Like commercial, so things like retail and office are still pretty weak. So from a high level, really the biggest question mark in the building product space just really remains on the inflection point for residential demand. Companies are confident in the long-term outlook.
They're still citing the under-building that's occurred in new residential construction and the pent-up demand for repair and remodel activity after several years of the declines there. Right. Obviously, interest rates and overall economic activity play a big role into what could be an improvement in resi and R&R demand.
When do you think that picks up? I mean, do we need a little bit more certainty around tariffs and just economic activity? I mean, the overall economy, consumer spending, jobs all seem to be pretty stable.
So what do you think is going to be the big key to change that demand trajectory? Yeah, I think a lot of it's going to center around consumer confidence, which would be clarity around where things are going, especially on the housing side. I think people find it difficult, especially on the entry level side, to buy a house when there's a little bit more uncertainty around what their next six months is going to look like from a job security standpoint.
So we need consumer confidence to really move here. Interest rates are hanging high, and it's been a while now. So I think a lot of people are starting to digest that this might be the newer normal.
I mean, a hundred basis points decline in the mortgage rate from 7% today would definitely be helpful, just in spurring demand and consumer confidence there. Because like I said, I think a lot of people believe that there is still this underlying demand for housing, particularly as millennials age and even the younger generations start to get into that home buying age. That has not changed in the United States.
So there is going to be this underlying demand, just really that comfort and consumer confidence that they need. Absolutely. Okay.
Andrew, let's wrap up with you. You had a number of water tech companies at the conference. What did you pick up?
Thanks, Matt. So similar to the broader industrial space and Nicole's multi-industry sector, I think the water names play in many different end markets. But overall, demand trends seem relatively stable based on the company updates.
Pushing through price as relates to tariffs was a big topic. And thus far, they seem to be sticking broadly and not destroying customer demand in a meaningful way. When we drill into some of the different end markets, water utilities are one of the bigger, more important end markets for this group.
And they are also historically among the most defensive. So on that front, the companies are showing no signs of demand cracking here. The ability for these water utilities to push rates through to customers, even with inflation where it is, not showing any signs of problems ahead.
We also have construction exposure, similar to what Colin just mentioned. Their resi activity has been depressed, has been pressured by interest rates. But in contrast, commercial or non-resi activity has been holding up better.
For this group, they have a nice exposure where that tends to be a bigger percent. And resi often is a quarter or less of their businesses. And finally, thinking about investor sentiment on the group, the water names typically are high quality, defensive, subsector with a lot of secular tailwinds.
Investors often white them in uncertain macro backdrops. And that's where we believe we are now. So I think, again, investors tend to keep coming back to these names when it's a little rocky out there.
Right. And just pivoting on the pricing side, as you saw some of these companies start to price in anticipation of the tariff coming through. And as I discussed with Nicole earlier, some of these tariffs may not be as high as expected.
We'll see. How do you think that plays out with pricing? And do these companies have different pricing strategies around that?
Yes. So we've seen different approaches to pricing so far this year. You know, the norm for industrials, probably for everyone on this call, is to put through a January price increase each year that just is to deal with normal inflation.
But obviously this year, it's a different regime with tariffs. So that happened. And then for some of our companies, they put through a price increase around the beginning of the second quarter to deal with tariffs.
Then others have even gone ahead with a third increase in May. But we've seen some interesting pushback or companies start to toggle that back. So that's been unique, different this year.
And then another dynamic we've seen is companies trying to hold off on pricing, absorb the cost from tariffs themselves in an effort to gain goodwill with customers. And their view is that over the long run, you know, that's going to work out better for them. Okay.
All right. Well, thank you, everyone, for your time today. If you'd like more information on anything discussed here, please reach out to your Deutsche Bank sales rep.
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