The new German governing coalition has agreed to terms that anticipate the formation of a €500 billion infrastructure fund, as well as a funding structure for large-scale investment in defense and an increase in deficit spending limits for federal state funding. This has the potential to materially improve the outlook for numerous sectors within high yield.
Construction in Germany has fallen sharply over the last two years, with building permits in 2023 and 2024 at levels 45% lower than the average number from 2017 – 2021. This German decline comes at a time when France has experienced similarly weak conditions. With these two countries historically contributing around 40% to construction activity in the European Union, the knock-on impact to construction-exposed issuers has been immense, but it has also fed through indirectly to other sectors, with multiyear lows in German consumer confidence readings over the last few years.1
The remit of the new infrastructure fund is broad in scope, but ultimately has the potential to move numerous issuers from operating at trough conditions to strong top-of-cycle conditions. We would highlight issuers in the building material and equipment rental sectors as obvious beneficiaries, but certain chemical issuers in Europe (e.g., polyvinyl chloride and paint manufacturers) have also been under material pressure and stand to see a dramatic shift in demand profile. These sectors are currently operating at low levels of inventory and at historically depressed pricing; while the ramp-up in general activity might not come through until 2026, early-cycle sectors that may also require restocking might see a benefit emerge sooner.
The high yield and leveraged loan market also contains numerous issuers from the heating, ventilation and air conditioning, general and electrical installation, and testing and inspection markets that will see a direct increase in demand from greater infrastructure spending. That said, a number of German companies have raised concerns about difficulties in hiring skilled manual workers even in the current environment. We are mindful that, as a second-order derivative without certain labor market reforms, the additional demand may place upward pressure on wage inflation, with these labor-intensive sectors being more exposed than others.
While mindful of the current tariff and geopolitical backdrop, in addition to issuers directly exposed to the large increase in infrastructure spending, there could be a multiplier impact that creates a large indirect benefit to the general economy. While German companies currently make up 10% of the European high yield market,2 neighboring France and the Netherlands add another 31%—a substantial universe that could provide benefits to alert bond investors.
