Investing in U.S. Infrastructure: A Safe Harbor in Volatile Markets

In the current volatile market, particularly where mega-cap tech stocks see fluctuations and bond yields move unpredictably, the U.S. infrastructure sector shines for its relative stability and strong performance.

Sector Attractiveness

The attractiveness of this sector goes beyond short-term cycles, driven by robust underlying fundamentals and supportive government policies. Analysts at Gavekal Research identify U.S. infrastructure investments as a reliable refuge for investors seeking stability amid market uncertainty.

Since mid-July 2024, the stock market has been erratic, especially in technology stocks, which have displayed notable volatility. For instance, the MSCI U.S. Information Technology Index remains 6.5% below its July peak.

Market Leaders’ Jitters: Analysts noted that the recent jitters from companies like Nvidia (NASDAQ:NVDA) indicate market leaders may be struggling.

In contrast, infrastructure stocks in the U.S. have performed exceptionally well, with the sector’s MSCI benchmark reaching new highs.

Reasons for Resilience

One of the primary drivers of the U.S. infrastructure sector’s resilience is continued federal government support. President Joe Biden‘s 2021 infrastructure legislation allocates significant funding for projects through 2026, providing a strong foundation for the sector.

Moreover, infrastructure investment enjoys rare bipartisan support, as seen with the energy bill spearheaded by Senator Joe Manchin and Republican Senator John Barrasso. Regardless of the upcoming general election outcome, U.S. infrastructure is likely to remain a top priority, cementing continued funding and support.

Safe Harbor

For investors anticipating a potential U.S. recession, infrastructure stocks may provide solace. Unlike growth-sensitive sectors like industrials, infrastructure stocks primarily fall within defensive categories such as communication services and utilities.

These sectors are recognized for their stable cash flows, largely unaffected by economic downturns. Furthermore, a recession is likely to prompt a significant drop in interest rates, benefiting the long-duration return profile of infrastructure stocks.

AI Boom Outlook

The recent volatility in large-cap tech stocks invites speculation on whether the AI boom is pausing or ending. Regardless, U.S. infrastructure stocks seem well-positioned. If the AI boom resumes, infrastructure investments could still perform solidly, even if they lag behind tech stocks. Conversely, if the AI boom is waning, investors may turn back to infrastructure, which saw considerable gains after Biden’s infrastructure law passage in 2021.

Value Proposition

In comparing U.S. infrastructure equities to large-cap tech stocks, the former presents a more attractive value proposition, especially in the current market environment.

While U.S. infrastructure investments are generally seen as safe, risks remain. A sudden rise in oil prices, potentially triggered by escalating geopolitical tensions, could increase U.S. yields, adversely impacting infrastructure stocks.

Potential Geopolitical Risks: Analysts caution that the chance of an escalatory cycle in the Russia-Ukraine war and heightened Middle Eastern tensions means an oil price spike cannot be dismissed.

Nevertheless, Gavekal Research points out that market reactions to geopolitical events are usually short-lived. Thus, any resulting dips in infrastructure stocks could be viewed as buying opportunities, given the sector’s robust fundamentals and attractive valuations.