By Ambrose O’Callaghan
The promise of a new U.S. administration has encouraged speculation over which sectors will benefit in 2025. Industrials continues to be one of the key areas of interest, as it offers investors an exciting opportunity to participate in several short, medium, and longer-term themes. The core of these themes is centred around the three Rs: Recovery, Reshoring, and Rebuilding.
Before we dive into those themes, let’s recap the sector’s composition. This sector is made up of companies that produce capital goods as well as services that support other businesses and manufacturers. Some of the groups in this sector include capital goods, like aerospace and defence, commercial and professional services, which includes a variety of service subindustries, and transportation, which comprises groups like sea, air, and land transport. The industrials sector is relatively diversified when compared to many other sectors in the broad market indexes.
S&P 500 Industrials Sector Sub-Industry Weights
Source: Bloomberg, Harvest ETFs, As of January 21, 2025.
The Recovery
The evidence continues to mount that the U.S. Federal Reserve (“The Fed”) has managed to accomplish the rare feat of achieving a “soft landing” (i.e. winning the fight to reduce inflation, without triggering an economic downturn). Recent data suggests the employment market may be stabilizing. At the same time, inflation has fallen significantly from its post-pandemic peak.
It’s seemingly clear that the Fed will likely continue to cut interest rate. However, the pace and magnitude of future interest rate adjustments remain uncertain.
Implied Fed Funds Interest Rate
Source: Bloomberg, Harvest ETFs, Latest available as of January 21, 2025.
Economic policy uncertainty is at elevated levels with the new Republican administration now handling the reins. The looming threat of a trade war has threatened to destabilize the global status quo.
Leading Economic Index (LEI)
Source: Bloomberg, Harvest ETFs, Latest data available as of January 21, 2025.
Notwithstanding, leading indicators of economic activity in the U.S. are showing early signs of inflecting upwards. If these early indicators developed into a broader re-acceleration in economic activity, many industrial companies are well-positioned to benefit. That could be particularly potent as the manufacturing side of the economy recovers following nearly two years of contraction in industrial production.
US Industrial Production
Source: Bloomberg, Harvest ETFs, Latest available as of January 21, 2025.
Reshoring and nearshoring in 2025
The first Trump administration succeeded in terminating NAFTA and replacing it with the United States-Mexico-Canada Agreement (USMCA). The USMCA increased automobile rules of origin (ROO) requirements by 12.5% to 75% of the automobile’s value. That increase in domestic sourcing aimed to bolster U.S. employment in the sector.
Many private companies have been actively exploring the reshoring of manufacturing over much of the last decade. However, several key events served to act as a significant catalyst for accelerating this theme. There is no doubt that the COVID-19 pandemic exposed the fragility of the global supply chain as companies struggled to keep pace with surging demand.
Baker, Bloom & Davis
US Categorical Economic Policy Uncertainty Index – Trade Policy
Source: Baker, Bloom, & Davis. Bloomberg, Harvest ETFs, as of January 21, 2025.
In the post-COVID world that we now live, supply chains have largely normalized. But there are new catalysts looming the may impact the supply chains. The rising geopolitical tensions and the threat of tariffs from the new GOP administration have the potential to drive companies to continue to evaluate investment in reshoring. Meanwhile, government programs like the U.S. Chips and Sciences Act for semiconductor investment, are also incentivizing companies to build manufacturing capacity in the United States.
Indeed, the new administration is laser-focused on bolstering domestic manufacturing, building on the gains made from 2016 through 2024. Some companies have chosen to relocate some manufacturing to nearby countries- commonly referred to as “near-shoring”. The trend has resulted in a notable shift in imports by country of origin.
US Imports From China
Source: U.S. Census Bureau, retrieved from FRED, Harvest ETFs, Latest available as of January 21, 2025.
US Imports From Mexico
Source: U.S. Census Bureau, retrieved from FRED, Harvest ETFs, Latest available as of January 21, 2025.
US Imports From Canada
Source: U.S. Census Bureau, retrieved from FRED, Harvest ETFs, Latest available as of January 21, 2025.
Besides investment in construction, and in machinery to automate and modernize domestic manufacturing capacity, transportation industries are also positioned to benefit from reshoring and near shoring trends. This is supported by trends like transcontinental shipping, which is replaced by increased use of road and rail.
Rebuilding the U.S.
Approximately $1.2 trillion was allocated for spending on U.S. infrastructure that included roads, bridges, rail infrastructure, and electric grid modernization in the Infrastructure, Investment, and Jobs Act (IIJA). The Act was signed into law in the United States in 2021 by the Joe Biden administration.
Construction Spending – Manufacturing
Source: U.S. Census Bureau, retrieved via FRED, Harvest ETFs, latest available as of January 21, 2025.
Beyond this, there are longer-term themes like the growth of AI-driven data centre investment. This includes the need for higher electricity generation capacity to support these data centres. Electrification, which is currently most acutely seen in the transition towards electric vehicles, is another development to watch. There is also continued investment in renewable energy. These trends all have the potential to drive sustained investment in infrastructure in the United States, ultimately leading to growth in construction spending.
Highlighting the aerospace and defence sector in 2025
The aerospace and defence sub-industry contains companies that are exposed to both commercial and government spending. It is well-positioned to benefit from several current and future drivers.
Commercial aerospace is the first catalyst, a market that has benefited from a combination of strong demand for air travel coupled with ongoing supply disruptions for new aircraft. That has, in turn, propelled strong demand for aftermarket engines and parts as airlines are pressed to keep aging aircraft in service.
Second, rising geopolitical tensions could result in continued increases in global spending on defence in the years ahead. That has the potential to benefit defence contractors in the United States. On January 23, US President Donald Trump said that his country would request that all NATO member countries boost their defence spending to 5% of GDP. Canada currently spends just 1.37% of its GDP on defence, while the United States spends just over 3% of its GDP on its military. Poland, which has the highest proportional defence spending, sits at 4.12%.
Nations are unlikely to meet such a lofty target, but the request will apply pressure that has the potential to put upward pressure on defence spending going forward. The Stockholm International Peace Institute (SIPRI) recently revealed that global military spending in 2023 reached $2.44 trillion – up 6.8% compared to 2022. This was the largest year-on-year increase since 2009.
Finally, the build out of satellite-based communication networks and resurging interest in space exploration has driven investment technologies to support those initiatives. A recent report from Spherical Insights estimated that the global space tourism market was expected to grow from US$881 million in 2023 to $35.1 billion by 2033. That would represent a compound annual growth rate (CAGR) of 44% over the forecast period.
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The Harvest Industrial Leaders Income ETF (HIND:TSX) offers exposure to leading industrial companies and emerging trends. Some of these companies include household names like General Electric, Lockheed Martin, Union Pacific, and Uber Technologies. This equal-weighted portfolio of 20 large-cap North America-listed industrial companies is overlayed with an active covered call writing strategy to generate high monthly cash distributions. HIND offers diversified exposure to the industrial sector combined with the high monthly income from Harvest’s time-tested covered call writing strategy.
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