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Infrastructure is the backbone of any healthy economy, and America’s is in desperate need of refurbishment and investment. Indeed, President Biden campaigned on a promise to revitalize our aging infrastructure and to invest heavily in clean energy. Biden recently took the first step in that direction by introducing the $2.3 trillion American Jobs Plan. Let’s talk about this plan’s winners and losers, as well as what it could mean for your investment portfolio.
What’s the Plan?
All of the fiscal stimulus pumped into the economy in the past year has been aimed at helping businesses and individuals manage the economic impact of the COVID crisis. As such, these measures have been relatively short lived. But the infrastructure plan is expected to have a much longer shelf life. Spending will occur over the next eight years, and its economic impact is expected to last much longer. In fact, in 2021 alone, infrastructure spending—along with the easy monetary policy and rebound in post-COVID spending—is expected to push GDP growth to more than 6 percent.
According to the White House fact sheet on the American Jobs Plan, there are a few primary goals of this infrastructure investment:
- Fix highways, rebuild bridges, and upgrade ports, airports, and transit systems (cost: $447 billion)
- Deliver clean drinking water, a renewed electric grid, and high-speed broadband to all Americans (cost: $311 billion)
- Build, preserve, and retrofit more than 2 million homes and commercial buildings, modernize our nation’s schools and child care facilities, and upgrade veterans’ hospitals and federal buildings (cost: $378 billion)
- Solidify the infrastructure of our care economy by creating jobs and raising wages and benefits for essential home care workers (cost: $400 billion)
- Revitalize manufacturing, secure U.S. supply chains, invest in research and development (R&D), and train Americans for the jobs of the future (cost: $580 billion)
- Create good jobs by electrifying vehicles (cost: $174 billion)
But who are the expected beneficiaries of this infrastructure plan, and are there companies and industries that will be negatively affected? Here’s what investors need to keep in mind.
The Winners Are . . .
Construction companies and their suppliers. These companies stand to benefit substantially from the American Jobs Plan. More than 20,000 miles of roads are set to be modernized and 10,000 bridges repaired. In fact, public investment in infrastructure is expected to match levels last seen in the 1960s.
Electric vehicle, battery, and charging station manufacturers. Funding will be provided for the construction of about a half-million electric vehicle charging stations. So, the plan bets heavily on spending meant to increase the use of electric cars, which today make up just 2 percent of the vehicles on America’s highways. Companies will be incentivized to manufacture electric vehicles and batteries, and consumers will be encouraged to purchase electric vehicles through tax credits.
Domestic manufacturing and R&D. There is likely to be bipartisan support for increasing R&D credit and manufacturing incentives to encourage domestic production. Increasing investment in this space will help the U.S. maintain its leadership, especially with China emerging as a leader in R&D investments.
Green energy supply chain. The plan proposes massive investments in green energy, including modernizing power generation to deliver clean electricity, as well as a production and investment tax credit for clean energy generation and storage. This investment will be beneficial for companies involved in power infrastructure, including wind and solar generation, transmission equipment, nuclear power, and battery storage companies.
Broadband and internet. With $100 billion specifically earmarked for increasing internet connectivity and infrastructure, we should expect strong returns for firms that specialize in this space.
Materials and commodities. All the infrastructure build-out will require the use of different materials, commodities, and aggregates, benefiting companies in this space.
Technology. Technology is the backbone for most major businesses and economic activities today. So, an economic boom and infrastructure build-out are positives for technology companies in several domains.
Business services companies. Greater economic activity is always good for the likes of equipment rental providers, credit rating agencies, paycheck processing companies, and so forth.
Traditional oil companies. This might sound counterintuitive, but the plan to rebuild America’s infrastructure, along with a world revving up its economic engine and people emerging from pandemic lockdowns, will need to rely on fossil fuels (at least for now). Building roads and bridges will require lots of asphalt, which is derived from the heaviest and most dense material in a barrel of crude oil.
And Now for the Losers . . .
On the flip side, there are some industries that might see a long-term secular decline if the infrastructure plan goes through.
Fossil fuel and autos. Fossil fuel companies will be affected by the removal of subsidies and the government’s push into clean energy. Further, auto companies that continue to focus on internal combustion engines may see a decline in business as the government pushes for electrification.
Corporate tax hike. The bigger effect will result from the corporate tax hike, which the government wishes to implement to pay for part of the infrastructure plan. Primarily, the plan includes raising the corporate tax rate from 21 percent to 28 percent. A minimum tax rate of 15 percent is being proposed for companies generating more than $2 billion in profits, and the minimum global profits tax will be raised.
A broad effect will be seen across all sectors and industries, but this plan will have a greater impact on companies that are currently paying very little, if any, taxes and on multinationals. This group includes many investors’ favorite technology companies. More important, the tax impact will be felt immediately, while the benefits of infrastructure spending will accrue over a longer period. It is estimated that if the tax hike to 28 percent goes through, it could knock almost 9 percent off S&P 500 earnings.
Upside Already Priced In?
While the infrastructure plan promises to boost economic growth for several years, investors have been quick to recognize the opportunity and much of the upside have already been priced in. This becomes clear when you look at the rotation in performance between value and growth stocks since Election Day in 2020. Value indices contain many of the “old economy” companies that stand to benefit from the infrastructure plan, and investors started attributing a greater likelihood of some form of infrastructure spending since the election.
While the easy money has already been made, there remain pockets of underappreciated stock opportunities for investors who are willing to dig deeper for longer-term plays. For those who want to take a more diversified approach, infrastructure-focused ETFs or funds could be good options for the right investor. Finally, it is important to remember that the plan could undergo significant changes as it is negotiated into law. As always, the devil will be in the details.
