Big Government Subsidies Will Be a Boon for This Industry

The U.S. is spending big... and our allies are worried.

Since he took office, President Joe Biden has committed more than a trillion dollars toward rebuilding American industry.

He introduced incentives for domestic manufacturers in key industries, aiming to create hundreds of thousands of new jobs.

In late 2021, he signed the $1.2 trillion Infrastructure Investment and Jobs Act. Its goal is to rebuild U.S. infrastructure.

And one year ago, he signed the CHIPS and Science Act, which will direct $280 billion in spending toward the semiconductor industry. He also signed the Inflation Reduction Act ("IRA"), which includes $369 billion in spending on energy security.

The IRA kick-started U.S. investment in green energy... and it kicked off a battle of subsidies between the U.S. and its peers.

You see, ally nations like Germany and Japan are worried that the U.S. is trying to dominate every industry. If they don't match its subsidies, their domestic industries may fall behind.

In June, Germany launched a multibillion-dollar subsidy program to help its manufacturing sector decarbonize. Japan plans on subsidizing its semiconductor industry in an attempt not to lose out to the U.S.

A lot of investors are worried these subsidies could create a race to the bottom. These supposedly allied nations are spending billions of dollars just to avoid losing out to the U.S.

These folks are missing a far more important point. As we'll explain today, this spending is creating clear winners and losers... within the U.S. stock market.

Industrial decline ravaged former U.S. centers of industry...

As factories moved abroad, we abandoned thousands of towns and cities around the country. It was particularly bad in the Rust Belt region.  

These subsidies are a chance to bring those cities back to life. The bills mean hundreds of billions of dollars will be reinvested into old factories, roads, and bridges. Project developers estimate they'll create up to 85,000 new jobs.

To rebuild these once-illustrious cities of industry, companies will need new factories, offices, and other facilities. That's where construction and engineering (C&E) comes into play...

Biden's subsidies will stimulate demand for new industrial projects. C&E companies will have their plates full working on all of these construction projects.

And what's good for C&E is also good for manufacturing. Manufacturing companies make a lot of the equipment and materials that C&E companies use to get their jobs done.

As long as C&E companies are in high demand, manufacturing will win as well.

The benefits are already kicking in. C&E and manufacturing firms' profitability is on the rise...

The industry's aggregate Uniform return on assets ("ROA") jumped from around 10% in 2018 to 16% in 2022. Analysts expect this trend to continue... reaching an aggregate Uniform ROA of more than 17% by 2024.

Take a look...

Even with a possible recession on the horizon, analysts think C&E and manufacturing will keep getting stronger. We feel the same way.

The coming recession won't hurt all sectors equally...

If interest rates stay high, rising purchasing costs will hurt home demand. That will make real estate a difficult sector to invest in. On the other hand, high interest rates mean banks can lend money at higher rates and bring in more cash.

So financial stocks will benefit from the same factors that are hurting real estate.

Regular readers have heard us say that more than 50% of your portfolio's performance has nothing to do with the stocks you pick. It has to do with the underlying sector. More than ever, that's a critical data point to keep in mind.

A boatload of spending is set to hit C&E and manufacturing companies. The industrials sector in general is set for success... and the C&E industry in particular.

Regards,

Joel Litman
August 21, 2023

Editor's note: Joel says the industrial sector will be one of the biggest winners of 2023... But a rare market event is about to trigger a massive opportunity in an entirely different group of stocks.

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