Investor Essentials Daily

The U.S. is facing an unprecedented need for investment which will directly impact this industry

November 22, 2021

After much fanfare, the current administration has finally passed the infrastructure bill that has been stuck in congress these past few months. This will act as a catalyst to the underlying need for U.S. corporations to finally invest in the capex they have been putting off for so long.

By paying attention to a few key indicators, we can already see that the economy is spinning back up even while supply chain challenges are being worked through.

Below, we will explore what our key signals are saying for how you should think about your portfolio.

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We have been hammering the drum for quite some time about the upcoming capital expenditure (“capex”) cycle in the U.S.

The country’s aging public infrastructure has long been a concern among voters and politicians. Yet little seemed to ever come about of discussions to spend on repairs.

That all changed just a few weeks ago when one of the crown jewels of President Biden’s economic agenda finally made it through Congress.

The $1.2 trillion – or $600 billion depending on how you count the already approved spending – infrastructure bill has finally become law…

The infrastructure bill should provide big tailwinds for public and private investment across the U.S. economy.

The money will be spent in areas ranging from electric-vehicle charging stations and broadband expansion to more traditional infrastructure like roads and bridges.

At $1.2 trillion in spending, the bill amounts to an equivalent percentage of gross domestic product (“GDP”) that the U.S. spent rebuilding Europe after World War II under the Marshall Plan.

Only by comparing the current infrastructure plan to the Marshall Plan can investors see how big of a catalyst infrastructure spending could be in the years ahead… 

More spending looks set to boost an already strong economic recovery. It’s quite telling that spending on infrastructure will be bolstered by a strong economy in terms of production.

Volumes for construction materials have been on a rapid rise as the economic recovery powers are ahead.

Steel production, for example, had already bounced back from the slump of the pandemic and is back at volumes last seen between 2018 and 2019 when the economy was humming.

Now, the economy is positioned to pick up even more speed as demand for raw materials pushes even higher.

This is a dream scenario for many basic materials companies.

These firms process naturally occurring substances like the oil used to power machines or the stone used to produce cement and gravel.

High infrastructure spending is also a great scenario for the industrial companies that take raw materials and turn them into valuable products.

The big names in steel and aluminum production and the companies that refine copper products into wire and cable are in this category.

The market for these products is currently characterized by rising demand and constrained supply. In other words, a recipe for higher prices.

Firms with the pricing power to pass any input cost pressures will inevitably see their margins and profitability expand.

The financial press has been shouting from the rooftops about the 30-year-high inflation print that the U.S. Bureau of Labor Statistics released last month. 

As we’ve previously discussed, we still don’t think inflation is going to derail the market.

However, we believe that the coming capex cycle has the potential to be a major tailwind for many materials and commodities companies. It’s a bonus that many will benefit from prices staying higher for a bit longer than expected.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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