Underground Construction - April 2021 - 18

Daniel Shumate | Managing Director, FMI Capital Advisors Inc.

2021 Utility & Communications
Construction Update
As we contrast March of 2020 to
March of 2021, the changes are truly
unprecedented. Beginning in March of
2020, over 22 million would lose jobs
within two months, most of the American
economy was put on life support, and
we knew very little about the virus that
would upend our daily lives.
Fast forward to 2021 where Americans
are beginning to have access to vaccines,
the virus is on the wane, and the
prospect for meaningful infrastructure
support is probable and the picture
is much more stable. Substantial
investment is expected to occur in both
urban and rural power markets, as well
as communication markets over the
coming 12 months. I talk often about the
opportunities and expected investment
40

(which remain high), but we also want
to make sure that at a high point for
stock valuations and optimism , we pay
attention to risks, as well.
One risk for those with exposure to oil
and gas is the regulation and de-emphasis
of all fossil fuel related infrastructure. In
the markets that are most aggressive, we
have seen calls for " no new gas service
hook-ups " while in other regions, the
environmental pressures for permitting
have limited normal activity.
In addition, we anticipate a continued
decline in U.S. oil production despite the
recent price increases due to challenges
put in place by the Biden administration.
This will impact our power generation
markets meaningfully - with the switch
to electric heat and electric cars, the

S&P 500
UCC Index

Percentage

30
25
20
15
10
5
-5
21-Dec

28-Dec

4-Jan

11-Jan

18-Jan

25-Jan

1-Feb

8-Feb

15-Feb

22-Feb

1-Mar

8-Mar

15-Mar

FIGURE 1: 3 Month UCC Index. Source: FMI Research, S&P Capital IQ; as of December 11, 2020
219

S&P 500
UCC Index

Percentage

169
119
69
19
-31
Mar-20

Apr-20 May-20

Jun-20

Jul-20

Aug-20

Sep-20

Oct-20

Nov-20

Dec-20

Jan-21

Feb-21

FIGURE 2: 1-Year UCC Index. Source: FMI Research, S&P Capital IQ; as of December 11, 2020

APRIL 2021 | UCONonline.com

demand for power in the United States is
expected to rise rapidly and generating
capacity will likely be unable to keep up
without the use of fossil fuels.
The second risk could come from the
bond markets, as the treasury is pushing
more debt into the marketplace. If the
infrastructure bill is as advertised, at
nearly $2.0 trillion, then in the past 18
months, we would have appropriated
over $8 trillion in stimulus. It is almost
impossible to put that number into
context, but in less than one year, the
United States will have seen gross federal
debt grow over 18 percent (representing
~$84,000 per American).
This can impact the infrastructure
market in many ways, but a couple of
examples include: if bond yields rise
meaningfully, then the cost to ﬁnance
projects increases and the amount of
work that can be completed goes down.
Alternately, if the cost to ﬁnance U.S.
debt increases meaningfully, then we
can see higher taxes and market -limited
government spending in future years.
The third risk that we are monitoring
is the single-family market. Currently,
limited housing supply and very low
mortgage rates have caused prices to
increase signiﬁcantly, creating wealth

Fast forward to 2021 where
Americans are beginning
to have access to vaccines,
the virus is on the wane, and
the prospect for meaningful
infrastructure support is probable
and the picture is much more
stable. Substantial investment
is expected to occur...

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Underground Construction - April 2021

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