Global Infrastructure Stocks in Focus Amid Potential $1 Trillion US Package Under Phase 4

Summary

• Equity markets in focus amid speculations around US releasing US$ 1 trillion worth of infrastructure package under the potential Phase 4 financial aid, as the government focus shifts from business and personal aid to the long due infrastructure spending.
• Key target areas being the development of roads, bridges, tunnels and even 5G wireless infrastructure and rural broadband.
• World Economic Forum ranked the US infrastructure at 9th in the world and quality of its roads at 11th position, which urgently calls for addressal at a time when the low-interest-rate environment would also support delivery of public spending at an inexpensive rate.

In the United States, loosening of lockdowns has encouraged modest increases in economic activity and instilled some optimism around economic recovery. Also, the purchasing manager’s index (PMI) for the month of May 2020 highlighted that the global economy is declining at a slower pace than in the last month (April 2020). However, social distancing continues to pressure the service sector despite lockdowns being lifted, as consumers remain concerned about the virus, causing subdued recovery in tourism and other hard-hit industries.

The stimulus packages being announced by governments around the world in billions and trillions to uplift the economies and meet the challenges being presented by the transition that is required from restarting businesses and bringing back employees, are among the key drivers in keeping business and consumer confidence going.

Post the speculations around US releasing the infrastructure package, S&P 500 moved up 1.90% on 16 June 2020 and has climbed up over 30% since mid-March 2020. However, profit booking was experienced next day, as S&P 500 Index went down by 0.36% to close at 3113.49 on 17 June 2020.

While the ride remains bumpy, owing to uncertainty around the COVID-19 pandemic, time and rally in the markets have a way of taking the edge off market volatility.

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Trump Plans A Trillion Dollar Investment to Spur Infrastructure Activity

Reportedly, the US President is considering plans to release at least US$ 1 trillion of infrastructure injection, to stimulate the world’s biggest economy and support the development of roads, tunnels, bridges, 5G wireless infrastructure, rural broadband, and other infrastructure priorities. This would be part of the stage four of stimulus packages passed in wake of COVID-19, but no official announcement has been made as of now. The prevailing low-interest-rate environment would also be conducive if such a package is announced at this time, as it would make public spending cheap and easier to finance.

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According to popular notion, America has neglected and deferred infrastructure development for far too long and now would be a good time to undertake such projects, as unemployment screams to record levels. According to market reports, lawmakers from both Republican and Democratic Party in the US are debating the timing, scope and need for this new package and a draft plan may be underway. This indicates that the White House’s focus is now shifting from providing financial aid for businesses and individuals to growth stoking initiatives, as coronavirus-related restrictions start to subside.

The potential US infrastructure stimulus package has created a sort of optimism in the global infrastructure market and equity markets seem to have lapped up the news, especially the stocks of companies that may benefit from this new public spending.

World's largest construction equipment manufacturer and American Fortune 100 corporation, Caterpillar Inc. (NYSE:CAT), engaged in developing, engineering, building and selling machinery, engines, financial products and insurance to customers via a worldwide dealer network, moved up 0.97% to US$ 131.37 at the end of trading on 16 June 2020. American-based U.S. Concrete, Inc. (NASDAQ:USCR), specialising in concrete and related construction materials and solutions, also gained 22.59% to US$ 28.33 at market close on 16 June 2020. Mexican multinational building materials company, CEMEX S.A.B. de C.V. (NYSE:CX) shot up 12% with a market cap of ~US$ 4.27 billion.

However, next day on 17 June, CAT and USCR went down by 1.44% and 9.25%, respectively, while CX traded flat.

In Australia too, material and infrastructure stocks seem to have priced in the news. For instance, Sydney-based Boral Limited (ASX:BLD), engaged in manufacturing and sale of building and construction materials in Australia, US and Asia, also moved up 1.62% to AU$ 3.770 on 17 June, while on 18 June 2020 (AEST 01:17 PM), BLD was trading downward by 3.316%.

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As per the 2020 Budget Fact Sheet for Infrastructure published by the White House, America’s physical infrastructure, over the years, has been catalytic in making the US economy as one of the largest and most vibrant in the world. While core of the country’s infrastructure remains strongly built, there has been quite the need for modernisation, expansion and repair of the same.

The World Economic Forum ranked United States’ overall infrastructure as 9^th in the world and quality of its roads at 11^th position, according to the 2020 Budget Fact Sheet for Infrastructure. However, the United States enjoys 2^nd position in the World Economic Forum’s Global Competitiveness Index 4.0 2019 Rankings, covering 141 economies. Thus, it seems that investment, in addition to maintenance of the country’s infrastructure requires urgent addressal, as it would continue to age and deteriorate in performance and quality, thereby making less contributions towards the economic output.

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