Two Sectors to Watch if Trump Opens Taps

21/12/2016
Two Sectors to Watch if Trump Opens Taps

Summary

Donald Trump’s military-spending plans should help not just US defence contractors, but European firms with a large US presence. And while his infrastructure ideas need Congressional support, they could lift material suppliers and contracting companies in 2018.

Key takeaways

  • Trump plans to build more US ships, more fighter jets and a much larger US army.
  • Defence contractors could benefit if NATO nations increase their spending to prevent Trump from withdrawing from the organization.
  • Trump's ambitious infrastructure bill could generate positive demand in the US materials and construction sector.

Defence industry should get a boost

Donald Trump’s victory should be a positive development not only for US defence contractors, but for European firms with a significant US presence. The Republican Congress would likely help Trump boost the defence budget by raising Budget Control Act caps, and Trump has said he would focus his efforts on more US ships, more fighter jets and a much larger US army. To help finance his plans, he plans to conduct a full audit of the Pentagon, targeting bureaucracy and inefficiency – though this raises questions about longer-term contract conditions for the defence industry. Trump has yet to give cost estimates for his ideas, but independent think tanks have published a wide range of estimates, from USD 150bn to USD 900bn over 10 years.

Trump has also said he would consider withdrawing from NATO if its members do not meet the organization’s target spending levels of 2 per cent of GDP – a level that NATO says only five members (including the US) out of 28 will meet in 2016. While defence spending has already returned to growth in most NATO countries, and while medium-term growth plans are in place, there would still be a significant upside for defence contractors if other nations strive to reach the 2 per cent level.

Infrastructure spending could soar

With Trump hoping to pass an ambitious infrastructure bill within his first 100 days in office, we expect to see positive demand developing in the US materials and construction sector. Trump campaigned for USD 1 trillion spending over 10 years to fix America’s crumbling infrastructure assets, which would create large economic opportunities. His proposal relies on private financing and tax incentives and aims to be deficit-neutral, but there are limits to how much can be really financed privately, especially for repair, maintenance and improvement work.

Many aspects of Trump’s proposals are unclear, so more detailed information is needed to better assess the true economic impact of his plans. In addition, Trump first needs to get the support of Congress, and then the speed of delivery would depend on establishing an improved project delivery system. Overall, however, Trump’s bill – if enacted – should have a positive impact on the US economy, and on material suppliers and contracting companies, starting in 2018.

by
Kerstin Landau
(Global Research Sector Team Head, Industrials) and
Daniele Patti (Senior Research Analyst, European Industrials)


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