Last week, I attended the RW Baird Industrials Conference in Chicago. Landing at O’Hare Airport just five days after the presidential election, the atmosphere was charged with anticipation of significant political and economic change. Over the course of my trip, I met with more than 20 companies spanning the industrial spectrum, gaining insights into how the landscape is evolving amid a challenging backdrop.
Setting the scene: a time of transition
The global industrials sector has faced headwinds in recent years, grappling with high inflation in a post-pandemic world. Structural decline in Chinese industrial production, once a global growth driver, mirrors slowdowns in key European markets like Germany and Italy. In the US, soaring interest rates have curtailed residential construction, with non-residential projects now stalling. However, amid this cyclical downturn, some bright spots have emerged. Notably, large-scale reshoring projects, such as battery and EV plants, and the booming data centre infrastructure tied to AI growth are thriving.
This divergence between struggling and flourishing markets underscores the urgency of addressing sustainability challenges, particularly in decarbonisation and resource management. Water scarcity, in particular, looms large as a critical issue for both economic stability and long-term growth.
Water: a key resource and investment opportunity
Effective water management is emerging as a pivotal theme, both economically and as an investment opportunity. Reshoring manufacturing to the US requires reliable access to water, but with many regions already grappling with scarcity, innovative solutions are essential. Within our Improving the management of water investment theme, we see huge opportunities for companies to help the global economy manage water as a resource more effectively.
During my trip, I met with Veralto, a portfolio company specialising in water recycling and contamination testing for industrial and municipal clients. Veralto has performed well over the past year, showcasing its importance in supporting sustainable growth. Similarly, Ecolab, a long-standing portfolio stalwart, is seeing renewed earnings growth driven by increasing demand for its water and energy-saving products. From commercial kitchens to consumer packaging factories, Ecolab’s solutions are experiencing robust momentum.
Another standout was Advanced Drainage Systems, the US leader in stormwater drain solutions made from recycled plastic bags. As a critical enabler for new construction, its products are foundational to reshoring efforts. While recent market conditions have been challenging, a shift in US industrial policy under the incoming administration could catalyse growth for this essential player.
As water is priced more efficiently as a resource, with extreme weather events – such as severe floods and droughts – further strengthening the case for improving water management, we believe the companies we invest in will experience accelerating growth and deliver strong returns over the next decade and beyond.
Housing and energy efficiency: structural opportunities with cyclical challenges
The US housing market remains a long-term growth story despite recent cyclical headwinds. Structural undersupply since the financial crisis, coupled with demographic-driven demand from millennials, underpins this market's potential. However, rising mortgage rates and the lock-in effect of existing low mortgages have stifled activity in recent years.
I met with Trex, the market leader in composite decking, which has seen demand stagnate for over two years. Encouragingly, residential housing activity appears to be incrementally improving, suggesting potential upside for renovation-focused companies like Trex. Held under our Delivering a circular materials economy theme, Trex is one of the largest recyclers of plastic film in North America, upcycling approximately 400 million pounds of plastic waste annually, nearly all of which comes from post-consumer sources such as shopping bags, newspaper sleeves, bubble wrap and package liners along with product overwrap, shrink wrap and stretch film used to palletize boxes.
Similarly, TopBuild, a core holding in the fund range, exemplifies the potential in energy efficiency. As the leading supplier of insulation products in the US, TopBuild enables more sustainable housing solutions. While the company has faced a slowdown in 2024, management remains confident that state-level building codes will continue to support energy efficiency standards regardless of federal policy shifts. We think TopBuild’s structural strengths position it for robust performance into 2025 and beyond.
While the US housing market has faced recent challenges, the underlying structural dynamics of undersupply and demographic demand remain intact, presenting a strong foundation for long-term growth. Companies like Trex and TopBuild are well-positioned to capitalise on this resilience, with improving residential activity and a focus on sustainable, energy-efficient solutions providing avenues for recovery and expansion. As cyclical pressures ease, these market leaders are likely to benefit from the gradual rebound, underscoring the sector's enduring potential for investors.
Looking ahead: optimism amid challenges
Despite the cyclical difficulties facing much of the global industrials sector, the businesses I engaged with in Chicago were remarkably positive. The prospect of a new administration brings hope, particularly for companies tied to residential and non-residential construction.
Meanwhile, the critical need to manage water resources more effectively remains a unifying theme, creating substantial opportunities for innovative companies. As we look to 2025, we anticipate that broader themes—beyond the current AI-driven momentum—will drive markets forward. The Liontrust Sustainable Future funds are well-positioned to benefit from this anticipated shift in market leadership, laying the groundwork for a more balanced and sustainable economic outlook.
KEY RISKS
Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
The Funds managed by the Sustainable Future Team:
Are expected to conform to our social and environmental criteria. May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund. May hold Bonds. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay. May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings. Outside of normal conditions, may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash. May be exposed to Counterparty Risk: any derivative contract, including FX hedging, may be at risk if the counterparty fails. May invest in companies listed on the Alternative Investment Market (AIM) which is primarily for emerging or smaller companies. The rules are less demanding than those of the official List of the London Stock Exchange and therefore companies listed on AIM may carry a greater risk than a company with a full listing. May invest in smaller companies and may invest a small proportion (less than 10%) of the Fund in unlisted securities. There may be liquidity constraints in these securities from time to time, i.e. in certain circumstances, the fund may not be able to sell a position for full value or at all in the short term. This may affect performance and could cause the fund to defer or suspend redemptions of its shares.
The risks detailed above are reflective of the full range of Funds managed by the Sustainable Future Team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.
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