Get ready for a domestic investment boom, analysts at Jefferies said in a note on Thursday, Jan. 11.
With the U.S. contemplating an exit from Nafta, the dollar weaker and new tax incentives in place to repatriate profits, domestic investment could expand dramatically amid "strong" capex intentions.
"While the corporate sector is obviously euphoric over the tax changes, it is not often highlighted that it has improved the U.S.'s competitive position," Jefferies wrote. "Although the tax changes are designed to encourage company investment, the lowering of the headline tax rate is equally an incentive for foreign companies to base their operations in the U.S."
As for Nafta, Jefferies said the agreement has encouraged "off-shoring," or the placement of domestic manufacturing in neighboring countries with more favorable labor laws, cheaper exchange rates and lower wage minimums.
And on Tuesday, Jan. 16, the Department of Commerce is expected to formally submit recommendations to Donald Trump about actions to combat U.S. steel imports on national security grounds. Potential tools include tariffs, quotas, and import caps.
All this comes as the ISM manufacturing index is surging, Jefferies pointed out, and new industrial orders are rising -- that's good news for both industrials and materials, analysts said. With that, "steel producers with the greatest exposure to niche markets are perhaps the best positioned to benefit from the steel tariffs."
A lateral strategy to play the boom is through prefab metal building companies, Jefferies said. The industry leader there is Butler Manufacturing, whose North American business represents about 40% of Bluescope Steel Ltd. (BLSFY) .
Next choice would be Nucor Corp. (NUE) , Jefferies said, which has several metal building companies.
Last is NCI Building Systems Inc. (NCS) , "which makes buildings and other similar products and is probably the closest to a pure play."
"The bottom line is that the backdrop for the U.S. materials sector is improving," Jefferies wrote. "Corporate investment spending plans are surging while the lower headline tax rate ought to encourage some reshoring."
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