Election night was one of the wildest rides that investors have had since the Brexit vote back in June. The stunning decline in the Dow futures contracts on election night was topped only by the astonishing reversal it staged afterwards.
Investors sent several sectors soaring that are perceived to benefit the most from a Trump presidency, such as financials and healthcare. One of the biggest gainers of last week, however, was a sector that many may not have even thought about – steel.
Steel producers, such as Rio Tinto (RIO), Vale (VALE) and Nucor (NUE), have struggled mightily over the past several years as iron ore prices have plunged more than 70% thanks to weakness in the manufacturing sector, particularly in China. The challenges of producing profitable steel have damaged many balance sheets and driven some of the smaller producers to the brink of bankruptcy. The steel market, however, has improved considerably in 2016 as iron ore prices have risen nearly 50%. The VanEck Vectors Steel ETF (NYSE:SLX), the only pure play in the space, is up roughly 90%.
Despite the strong rise in steel stocks so far in 2016, there’s reason to believe that there are more good times ahead.
Setting aside for a moment Trump’s desire to build a wall along the Mexican border, one of Trump’s priorities during the campaign was his desire to invest $1 trillion in improving the nation’s infrastructure over the next 10 years. It’s a bold initiative made more complicated by the fact that he wants to fund it with private investment. While this plan may seem a bit audacious, both Republicans and Democrats generally agree that additional infrastructure spending is necessary. Trump also has the benefit of a Republican controlled House and Senate, so it’s likely that some type of significant infrastructure spending will pass.
On the macro front, steel producers should look to do better from an improving supply and demand balance. As Chinese demand for steel declined over the past few years, the supply glut grew forcing prices south. The global demand for steel is expected to reverse course this year and begin growing again fueled by a rebound in Chinese imports. In addition to that, both Vale and Rio Tinto trimmed their production forecasts for 2017. If their expectations for the steel market are a harbinger of what’s to be expected of the entire industry, it could provide the impetus for further price gains heading into the coming year.
The VanEck Vectors Steel ETF is a fairly concentrated play. It has just 27 names in the portfolio, led by Vale and Rio Tinto comprising more than one-quarter of the portfolio alone. The fund’s trailing P/E of 25 isn’t going to win over value investors, but the fact that iron ore is still relatively cheap along with the setup for further revenue growth should provide shareholders with some strong upside possibilities.
David Dierking is a freelance writer focusing primarily on ETFs, mutual funds, dividend income strategies and retirement planning. He has spent more than 20 years in the financial services industry and his background includes experience in investment management, portfolio analytics and asset/liability management at both BMO Financial Group and Strong Capital Management.
He has written for Seeking Alpha, Motley Fool, ETF Trends and Investopedia and was also included in the panel for ETFReference.com’s “101 ETF Investing Tips from the Experts”. He has a B.A. in Finance from Michigan State University and lives in Wisconsin with his wife and two daughters.