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Dec 06, 2017

Advisory Intelligence: US industrial sector is booming, notes Nasdaq Advisory Services

Two key themes have been driving outperformance

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The US industrial sector continues to rally, with two key themes driving the outperformance: firstly, optimism for increased investment in infrastructure and secondly, a rising budget for US defense spending.

Putting this in context, Margarita Ignacio, director of the industrials practice at Nasdaq Advisory Services, says: ‘It has most definitely been a bull rally for the industrial sector. The space underperformed in 2015, so the start, or initiation, of the rally began in 2016 with President Trump being elected at the end of that year and that has extended fully into the current year.’

Booming infrastructure and defense spending have been key here. ‘The machinery space – as well as the aerospace and defense space – significantly helped the overall performance of the industrial sector. And the expectation for a higher fiscal stimulus and infrastructure development has really driven the performance of the industrial sector so far this year,’ observes Ignacio.

Moreover, a robust mergers and acquisitions environment continues in the sector, contributing to more speculative trading in potential acquisition targets. ‘Consolidation has been in the spotlight – and much that has been chronicled in the media has been M&A in aerospace and defense. That is a response to rising geopolitical tensions,’ notes Ignacio.

In turn, the focus on technology is helping to drive this activity. ‘The uptick in technology M&A has been driven by increased demand for improved process integration and more demand for tech development – in defense in particular. You can clearly see that longer term developments in the space. It relates to automation and digitization, which are really driving a lot of M&A.’

According to Thomson Reuters Eikon, there have also been fewer activist campaigns within the sector in 2017. But it is still an ongoing concern, particularly for smaller cap companies.

‘The majority of the activist targets in the industrial sector have been in the small cap – defined as companies smaller than $1 bn. We are seeing more selectivity by activists seeking alternatives to enhance shareholder value,’ notes Ignacio.

Nasdaq Advisory Services provides insights into what type of players are accompanying the rally, and if the sector is attracting more growth-oriented investors.  

‘In the industrial space we track institutional ownership. And I would say the industrials have been known for more value-oriented investors,’ says Ignacio. ‘We have definitely seen an uptick in growth and even hedge fund ownership over the past year that has accompanied the rally. So our clients rely on us to differentiate on trading metrics.’

Moving into 2018, Nasdaq anticipate increased interest from industrial clients needing guidance on targeting in light of ESG and the impending Mifid II regulation, which becomes reality on January 3, 2018. ‘Our targeting team has done a lot of work on ESG compatibility with the buy side,’ says Ignacio.

And she adds: ‘Between ESG and Mifid II, clients are looking for more assistance on best practices. Small and midcap companies are especially looking for assistance on how to best position and market themselves in light of Mifid II.’

This content was produced by Nasdaq Corporate Solutions and first appeared on Nasdaq's website.


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