Which Small-caps Seem Likely to Benefit From Biden's Infrastructure Plan?

The term “infrastructure” has come to the forefront in recent months thanks to the Biden administration’s focus on renewing and improving America’s physical footprint through additional fiscal stimulus. It also has a dual aim of improving the pace of economic growth.

President Biden’s proposed $2.3 trillion infrastructure plan emphasizes clean energy, social inequality and education. It is likely to benefit many areas of the domestic economy including transportation, utilities, broadband, semiconductors, housing and construction, among others. To date, U.S. fiscal stimulus is already expected to accelerate U.S. GDP growth to the tune of 7.1% in 2021 and 5.1% in 2022.[1] This new infrastructure plan may provide even more upside potential to GDP estimates for 2022 and beyond.

Outside of technology, corporate capital spending as a percentage of operating cash flow has been relatively low in recent years. In fact, in real terms (adjusting for inflation), federal infrastructure-related spending has actually been negative. Within this, maintenance has taken up an increasing portion of spend, thus reducing the amount allocated to new capital projects. An acute focus on infrastructure investment has the potential to shift this dynamic, prompting an acceleration of investment that will boost recipient sectors, such as industrials, energy and utilities. Smaller companies, whose top-line growth is more correlated to growth in capital spending and investment than larger companies, may stand to benefit from increases in this spend.

However, it may take months before an infrastructure bill is passed because it will be subject to political negotiations. Nonetheless, there are companies within the U.S. small-cap universe that we believe could benefit not only from the improving economic-growth outlook, but also from any additional funds allocated toward infrastructure.

Which small-caps seem likely to benefit?

Although small-cap equities have materially outperformed their large-cap peers in the past year,[2] the outlook for small-cap equities appears positive in our view. We hold this optimistic outlook because small-caps tend to experience strong share-price performance relative to larger caps during periods of economic recovery. In our view, small caps that engage in the below areas may present compelling opportunities:

Environmental consulting and engineering services. The U.S. and other countries may pursue economic recovery from the Covid-19 pandemic via green infrastructure projects. As a result, water and environmental consulting companies may see demand accelerate in the coming months. These initiatives could help reduce carbon use and emissions while investing in climate resilience.  

Beyond this, a more stringent EPA and more funding toward urgent issues, such as emergent containments in the U.S. drinking water, would also drive demand for water-quality assessment and remediation expertise. Types of companies that may benefit include:

  • Water infrastructure
  • Water quality
  • Offshore renewable wind
  • Energy-efficient buildings

Trend toward electrification. Moving away from fossil-fuel use toward electrification has been increasingly popular in recent years, and the proposed infrastructure plan should only accelerate this trend. We expect the electrical density of our infrastructure to increase in the coming years, especially as economies recover. For example, we expect more telecom/data infrastructure, electric vehicle (EV) charging infrastructure and more commercial and institutional electrical construction to emerge.

As electrical infrastructure density increases, we think that demand  for electrical products will pick up. Several types of companies could benefit in this scenario, including those that produce:

  • Electrical raceway products
  • Products and services that frame, support, and secure component parts in a range of electrical structures and equipment
  • Systems in electrical, industrial and construction applications

Financing solutions for climate change. Financing-solution providers have already benefited from growth in renewable projects, more energy-efficient projects in commercial real estate and more sustainable infrastructure investment. The proposed infrastructure plan, which includes extended and new tax incentives, should indirectly benefit financing-solution providers. This could be especially true for those providers that focus on companies in certain markets, such as:

  • Energy efficiency
  • Renewable energy
  • Sustainable infrastructure markets

Waste management services. Under any infrastructure-spending increase, waste companies tend to be winners as they collect and process waste from construction and demolition of the aged infrastructure that is being renewed. Solid-waste businesses may benefit, including:

  • Collection, transfer and disposal services
  • Recycling services

Energy saving companies (ESCOs). Tax incentives and funding toward energy-efficient programs within commercial real estate should benefit ESCOs, which provide a range of energy solutions. These include design and implementation of energy-saving projects, among other services. Various types of companies and service providers may benefit as demand for ESCO services accelerates, including:

  • Providers of energy solutions (i.e., energy cogeneration, hydroelectric, and renewable energy facilities)
  • Project managers for energy efficiency/savings projects, particularly within commercial real estate
  • Providers of operations and management services, which are technical services required to establish, measure and maintain a specific performance level for an improved energy system
Important Information

Infrastructure-related issuers may be subject to a variety of factors that may adversely affect their business or operations, including high interest costs in connection with capital construction programs, high leverage, costs associated with environmental and other regulations, the effects of economic slowdown, surplus capacity, increased competition from other providers of services, uncertainties concerning the availability of fuel at reasonable prices, the effects of energy conservation policies and other factors.

[1] Aberdeen Standard Investments Research Institute, March 30, 2021
[2] Since March 18, 2020 through April 15, 2021, the Russell 2000 has returned 130.1% versus a return of 77.1% for the S&P 500. Source: FactSet
About Scott Conlon

Scott Conlon is a Senior Equity Specialist at Aberdeen Standard Investments. He is responsible for advancing the growth of the firm’s equity investment solutions in North America. Conlon works alongside the global investment teams and his primary role is to ensure that clients, prospects and consultants have clarity on the philosophy, process and investment positioning of Aberdeen Standard Investments’ global equity strategies. He joined Standard Life Investments in 2016 in a similar role. Prior to Standard Life, he was a Vice President and Portfolio Strategist at State Street Global Advisors for 11 years, with a focus on US, global and emerging market active, quantitative and factor-based smart beta equity investment strategies. Earlier in his career, Conlon worked at Merrill Lynch Investment Managers in its short-term fixed income group. He is an accomplished investment professional with more than 19 years of investment management experience. Conlon graduated with a BS in Finance from Bentley College and has an MS in Finance from the Carroll School of Management at Boston College. Scott is a CFA charterholder and has the FINRA Series 3 license.

Aberdeen Standard Investments is an Associate member of TEXPERS. The views expressed in this article are those of the author and not necessarily of Aberdeen Standard Investments nor TEXPERS. Follow TEXPERS on FacebookTwitter, and LinkedIn, for the latest news about the public pension industry in Texas.

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