For this post, we interviewed Sean Dillon, Technical Analyst at Pinnacle Advisory Group, for his thoughts on the importance of infrastructure to the economy, which companies might benefit from increased infrastructure spending, and how to fit this theme in a portfolio.

While Global X offers a U.S. Infrastructure Development ETF (PAVE), the information provided herein are the views of Pinnacle Advisory Group and should not be construed as an endorsement of the Fund or representative of Fund positioning.

• Why is now the time to think about investments related to rebuilding infrastructure?

While there has been some slight improvement in the infrastructure grade for the U.S. from American Society of Civil Engineers (ASCE), this is from a very depressed level. Most individual areas of assessment, like water facilities and transit receive a letter grade of C or D. The U.S. has spent only 2% of GDP on infrastructure over the last few decades and most of these funds were spent by state and local governments on operations and maintenance. The ASCE estimates that the infrastructure funding gap is close to $1.5 trillion. Therefore, there is a clear need; and at this time there could be broad support for an infrastructure spending package. Productivity has stagnated since 2010 and the Congressional Budget Office (CBO) has estimated that infrastructure spending raises productivity in the short and long term, which is why we think now is the perfect time to invest for the future.

• Which firms potentially stand to benefit from rebuilding US infrastructure?

The firms that stand to benefit from rebuilding US infrastructure reside in the material and industrial sectors. From the material sector, steel stands out as a clear winner under this theme. Constructing bridges, pipelines, etc. takes a large amount of raw materials, so the miners and manufacturers of these materials are well positioned. From the industrial sector, heavy construction, electrical equipment, and machinery stand to benefit as well.

From a portfolio perspective, this is how infrastructure fits into our portfolios. We utilize sector and industry rotation to gain exposure to investments that fit our view of the business cycle. Currently, we are investing in companies that benefit from building late cycle pressures like rising inflation and higher interest rates. Materials and Industrials companies fit into this late-cycle view, and specifically targeting companies that potentially stand to benefit from infrastructure spending provides additional positive attributes. According to our valuation work, these companies are slightly cheaper than the large market cap industries like conglomerates and diversified chemicals. The corporate tax cut also favors them slightly more due to their larger than average tax rates before the cuts.

• How important is working infrastructure to the economy?

Infrastructure is vitally important as it serves as the backbone to a strong economy. Rail, road and air infrastructure keeps supply chains open to efficiently deliver goods across the nation. Water and waste facilities need major repair so that our citizens can rely on them when it matters most. The US is slowly emerging as a dominant energy player in the world, but we can only go as far as our distribution network. In the digital age, strong, working telecommunications networks are needed more and more to connect people and communities.

A much more direct way to feel the importance of infrastructure is through the job market. The Brookings Institute estimates that 14 million people, 11% of the workforce, work in fields directly linked to infrastructure. Supporting infrastructure in this country directly supports current consumers, and many of the economic and demographic challenges facing this country in the near future will be much less daunting if our backbone is strong.

• What local infrastructure projects are underway in the Maryland area /how they might affect you & and your clients?

If you ask anyone who lives here, traffic can be brutal especially around D.C. and Baltimore. There are a tremendous number of transportation projects that need funding to maintain or build capacity. Our governor has prioritized a few of these projects like replacing the American Legion Bridge between Maryland and Virginia, rebuilding the Howard Street Tunnel, and providing better access to the Port Covington area in Baltimore. On top of that, it is estimated that Maryland will need $15 billion in drinking and wastewater investments over the next 20 years.

The best example of improved transportation infrastructure over the last 10 years is the Intercounty Connector (ICC)/MD-200. In 2011 construction was completed on the first part of the ICC connecting I-270 to I-95. And then in 2014 the road was extended to US 1. This new road has been a tremendous time saver for Maryland workers who travel from Gaithersburg to Laurel, or other points North on I-95 including Baltimore. They can avoid the gridlock traffic on 270 and the D.C. beltway enhancing productivity and easing stress levels. It has also been noted in a study by the University of Maryland that Baltimore Washington International Airport (BWI) was strengthened by increased commercial usage. This is one example where strong infrastructure is needed by all to provide reliable necessary services and to strengthen the local business community.