Wall Street is getting downright giddy about infrastructure.
President Joe Biden’s proposal to spend $2.25 trillion could unleash a “supercycle” of spending last seen in the 1950s, according to Morgan Stanley. With Democrats in control in Washington, the infrastructure floodgates could finally open.
At 10% of current gross domestic product, doled out over eight years, the plan reads like a Rooseveltian blueprint for economic and social engineering. More than $600 billion would go to conventional projects like roads, bridges, and public transit. There is $374 billion for tech, according to Goldman Sachs, including rural broadband, modernizing the electric grid, clean-energy storage, and electric vehicles.
U.S. manufacturing and research and development would receive subsidies and incentives worth $480 billion. And $500 billion would go for the caregiving economy and workforce development.
Packages like this bring out the knives in Congress. Opposition is already building over the cost and funding mechanism, including an increase in the corporate tax rate to 28%. Without Republican support in the Senate, where Democrats can’t afford a single defection, a bill would need to pass under complex budget reconciliation rules and wouldn’t be ready for a vote until the summer.
All of this assumes that financial markets cooperate. Ultralow interest rates are keeping a lid on the Treasury’s funding costs. But Treasury yields have been rising as traders price in higher inflation and widening deficits due to all of the fiscal stimulus that has already been injected—$5 trillion and counting. The Biden plan won’t pay for itself for 15 years, assuming its tax increases hold up. Higher deficits imply more Treasury issuance at potentially higher yields, raising the bill on taxpayers.
Another caveat is that infrastructure spending is like an intravenous drip that trickles through the economy’s veins for years. There aren’t enough “shovel-ready” projects to soak up anything close to $2 trillion. Indeed, infrastructure may be the messiest form of stimulus: It is distributed unevenly to states and localities, held up by zoning and contracting issues, and overseen by a patchwork of federal and state environmental rules. The economy may benefit long term from stronger growth and productivity gains, but it won’t happen right away.
Nonetheless, some economists view it as a long-term winner—addressing years of underinvestment in the country’s foundations. It could pick up the slack after more-immediate stimulus measures run dry.
“It’s an important step to addressing a structural challenge—generating sufficient demand to keep the economy at full employment,” says David Wilcox, a senior fellow at the Peterson Institute for International Economics. “I’m not alarmed by the price tag,” he adds, noting that a 10-year Treasury yield of 1.7% is still historically low.
The markets are betting that infrastructure will be a winner, too. Many stocks have run up, but further gains may arise if the market sees a bill inching toward passage.
Industrials are already outperforming, thanks to a cyclical recovery, and would be a direct beneficiary of an infrastructure bill, according to BofA Securities. “Don’t buy the spenders, buy the companies that get the money,” BofA says, referring to capital expenditure. “Regardless of stimulus, capex beneficiaries should outperform consumption beneficiaries.”
Invesco DWA Industrials Momentum
exchange-traded fund (ticker: PRN) has topped the sector’s performance charts, using technical factors to weight and adjust holdings. The
Industrial Select Sector SPDR
fund (XLI), tracking the S&P 500 industrials, offers more exposure to large-caps in the sector.
Engineering and construction companies have had strong runs, but their stocks don’t look overpriced on 2022 estimates.
(MTZ), for instance, goes for 18 times earnings, slightly below the
at 20 times. It’s one of Citigroup’s infrastructure picks, along with
Group (J), and
(PWR). All look “well positioned for growing investments in infrastructure and climate-change mitigation efforts,” Citi says.
Aggregates and construction materials supplier
(VMC) would be a beneficiary of spending on roads and bridges. Other winners include
(ROAD), according to Ben Phillips, a government-policy expert and chief investment strategist at Savoie Capital. He also likes
Evoqua Water Technologies
Great Lakes Dredge & Dock
(GLDD). Water stocks still look relatively cheap, he says, and would benefit from clean-water initiatives, including Biden’s plans to replace all lead pipes.
Prices are steep in clean tech since the markets started betting on a Green New Deal last summer. Still, if this is the start of a multiyear cycle, the sector could outperform long term.
First Trust Nasdaq Clean Edge Green Energy Index
fund (QCLN) holds around 50 stocks in the space. Clean-tech winners, according to Morgan Stanley, include
(RUN), and SolarEdge Technologies (SEDG). TPI makes wind turbine blades and is expanding into ultralight bodies and components for electric buses and trucks. Morgan Stanley calls Sunrun a “best in class” solar installer and says SolarEdge has “cutting edge” technology with an expanding market in energy storage and EVs. Both trade at steep market premiums.
For income investors, three ways to play the green theme are
(NEE), Atlantica Sustainable Infrastructure (AY), and Clearway Energy (CWEN). NextEra is one of the largest renewable-power companies in the U.S. and a utility operator in Florida, yielding 2%. Atlantica and Clearway each own portfolios of assets such as wind and solar farms, yielding 4.4% and 4.0%, respectively.
“They both have tailwinds and predictable cash flows,” says Josh Duitz, an infrastructure portfolio manager with Aberdeen Standard Investments. That could be a winning ticket if cooler heads prevail in the sizzling green-energy sector.
Write to Daren Fonda at [email protected]
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