For Industrials, Defense Likely Greatest Beneficiary

It’s challenging to predict what will happen following the election of Donald Trump as president, because he may lack the full support of the Republican Congress and may refine his policies as his team gathers information from business and labor leaders, but we can say with confidence that the near-term cone of uncertainty surrounding the performance of many industrial stocks just increased. Trump’s anti-free-trade rhetoric and policy uncertainty has led to an initially weaker U.S. dollar, which combined with talk of infrastructure spending and tax cuts seems to be pushing inflation expectations upward. This could result in U.S.-based manufacturers being more globally competitive against Japanese and European peers. However, increased inflation, expanding debt costs, and the erection of trade barriers could offset enhanced competitiveness through greater costs and faltering global demand.

Across our industrial coverage, U.S. and European defense contractors stand out as winners, while our outlook for other sectors is more mixed. We’re concerned about the impact of slowing trade and air travel hitting transports, aerospace manufacturers, and airlines. While we think the Trans-Pacific Partnership would be a net positive for Japanese automakers, we see the future of U.S. trade policies with Mexico as the key development for U.S. auto names. Heavy equipment firms, which like automakers are oriented to global markets, should benefit from a weaker dollar, but the prospect of greater debt costs could hurt their financing businesses. For homebuilders, we submit that the election outcome may actually spur increased consumer confidence for some Americans, and this could provide a housing tailwind. Finally, we don’t see much of an impact on the industrial gas companies we cover; engineering and construction firms might benefit from greater infrastructure spending, an intention Trump highlighted in his acceptance speech, but we take a cautious stance on real increases.

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