Donald Trump and Hillary Clinton don’t agree on much, but one thing they do agree on is the need for increased federal spending on America’s aging infrastructure. This is good news for investors.
In December, Clinton announced a plan to spend $275 billion on infrastructure, which includes everything from highways and bridges, to ports and airports, to expanded broadband internet. She would also invest $25 billion to create a national infrastructure bank, which her campaign says would generate an additional $225 billion in infrastructure investment through loans and credit.
Donald Trump has also called for huge investments in the nation’s infrastructure (his border wall being the most visible example), but has offered fewer specifics. In August, he said he would “at least double” Clinton’s infrastructure spending, which would put his plan at more than half a trillion dollars.
It’s not just both parties’ presidential candidates that agree on more infrastructure spending. Congress passed the FAST Act, a $305 billion dollar transportation bill in December, the first since 2005, with largely bipartisan support.
At a time when blue collar jobs are disappearing, advocating infrastructure spending, which would create construction jobs, is a good bet for politicians.
Infrastructure is also a good bet for investors. The iShares Global Infrastructure (NASDAQ:IGF) is up 11.17 percent this year, more than double the 5.37 percent gain in the broader S&P 500. U.S. companies have not performed quite as well, but are still strong: the S&P U.S. Preferred Infrastructure Stock Index is up 9.97 percent this year.
“We are seeing momentum at the federal level with the FAST Act. We are hearing both presidential candidates are both talking about infrastructure, and we are seeing a number of municipalities around the country that are putting in place specific tax measures,” said Mike Burke, Chairman and CEO of AECOM (NYSE:ACM), a multinational engineering firm. “So, all the right indicators are there that would cause us to feel fairly bullish about the prospects for the Americas.”
There is usually a year or more of lag time between when federal infrastructure investment is made and when the market responds, said Nicholas Coppola, an analyst at Thompson Research Group. Coppola noted that sector stocks took off in 2006, about a year after the last federal highway bill was passed.
“There’s a pretty long lag before they start hitting contractors,” Coppola said. “It looks like a 2017 event.”
The companies to watch in 2017 are construction, construction supplier, and engineering firms which do most of their business in the U.S. and get most of their funding from government contracts. Granite Construction Inc. (NYSE:GVA) generates 95 percent of its business from public infrastructure spending, and the company is already doing well. The company’s stock is up 16 percent so far this year ($48.47), and its second quarter revenue was $605 million, up 6.2 percent over 2015. Gross profit was up 14 percent over 2015, to $73.2 million.
Much of the construction and construction supplier industry has been hurt by a dormant energy sector, but suppliers of building materials like asphalt and gravel are able to avoid those headwinds, while still benefitting from public investment in roads and highways. Alabama-based Vulcan Materials Company (NYSE:VMC), is the largest U.S. producer of construction aggregate, which is an umbrella term for materials like gravel, crushed stone and sand. Vulcan stock has soared 20 percent in 2016 ($106.47). The company’s second quarter revenues increased 7 percent over 2015 to $355 million, while gross profit jumped 25 percent to $292 million.
Increased funding will certainly help the construction sector, but both candidates’ plans are fairly modest in comparison to what experts believe is needed to not just improve, but maintain, America’s infrastructure. As a percentage of GDP, current public investment in infrastructure is the lowest it’s been since World War II.
Most of the country’s infrastructure was built between 1950 and 1970, and much of it is now coming close to the end of its usefulness. One in nine of the nation’s bridges are rated structurally deficient; the average American bridge is 42 years old. The average dam is 52 years old.
The American Society of Civil Engineers (ASCE) has given America’s infrastructure a “D” rating. ASCE estimates it would take a trillion dollars to upgrade their ranking from a “D” to a “B.” Jamie Cook of Credit Suisse says the current proposals by both candidates will likely create only “modest tailwinds” for construction suppliers, contractors and engineering firms.
“While the dollars sound big they underwhelm versus what industry experts believe is required,” Cook wrote in a September analysis. Cook also said that sector stocks tended to outperform when a Republican candidate was expected to win the presidential election. However, that may be a function of lowered spending expectations. Republicans have traditionally opposed large federal funding projects.
With bipartisan support for federal spending combined with America’s aging highways, airports, and public transit systems, infrastructure stocks might be a good bet in the coming years, no matter who wins this election. Or the next one.