By Michael Russell
The US market is set to finally shift from the 'new normal' of low interest rates, low inflation and limited growth that has dominated since the recession. With President Trump vowing to ramp up fiscal stimulus at a time when unemployment is low and wage inflation is increasing, it seems only a matter of time before growth and inflation begin to pick up in earnest.
As America begins building things again, we believe the biggest long-term uplift will be found in high-quality industrials across the market cap spectrum. The range of industrial stocks likely to benefit from Trump’s proposed fiscal stimulus is broad. While construction spending was 6.1% of GDP at the end of June, the 50-year average is ~ 8.4%. Alongside infrastructure, other policy measures should also boost the sector and extend the cycle. The reduction in corporate tax rates and repatriation of $2trn in cash balances with one-off low tax rates will provide companies with the resources to invest, and deregulation of the banking sector should boost lending. Further, a smoother political landscape should encourage broader public spending. This has been declining significantly as a percentage of GDP since the 2009 stimulus package was halted by a gridlock in Congress. Now both Congress and the presidency are controlled by the Republican Party, already planned public investment should be unlocked.
While many investors are cautious about industrials, as the US economy is seven years into an expansion, this sector is actually coming out of a two-year recession. This was driven by the commodity collapse in mid-2014 and a slowdown in global growth, which led to significant revenue declines. There is potential for a strong earnings recovery driven by improved demand after several years of falling fixed costs.