Where’s big spender?

As Americans head to the polls today, all eyes will be on the US midterms. Consensus has Democrats taking the House and Republicans keeping the Senate, but elections in recent years have been notable for springing surprises, both in the US and elsewhere. Next week’s results may provide their own surprises, but whatever the outcome there is one area of US public policy which has agreement from both sides of the political divide: the desperate need for investment in America’s ailing infrastructure.

Donald Trump’s pledge to commit $1.5 trillion to infrastructure over the next 10 years has wide popular appeal because his plan addresses an obvious need: basic services in the US are not in good shape. Infrastructure plays a crucial role as the backbone of the economy, yet a prolonged period of underinvestment in essential services – from water and electricity to highways and airports – has left society’s critical assets creaking at the seams. This is not just a matter of inconvenience: public safety is an increasing concern, with unsafe drinking water, pollution-laden traffic congestion, and decaying road infrastructure just a few examples of the wellbeing of citizens being put at risk.

US government investment has been in a multi-decade spiral and the current 1.4% of GDP marks a 70-year low (Source: U.S. Bureau of Economic Analysis, 30 September 2018). It is also more than 70% off its peak in the 1950s, highlighting not only the magnitude of the spending cuts but also the ageing nature of the underlying assets. Infrastructure assets were not built with a lifespan of more than 50 years. Essential services require urgent attention, but with public finances under pressure, the private sector will play an important role in the restoration and upgrade of America’s critical infrastructure.

The need for infrastructure spending in the US

The US is not alone in its predicament. Global spending on economic infrastructure, which covers transport, electricity, water and telecoms, was $2.5 trillion in 2015. This contrasts sharply with the required amount of investment estimated at $3.7 trillion per year (Source: McKinsey, Bridging infrastructure gaps: Has the world made progress? October 2017). The resulting $1.2 trillion shortfall needs to be rectified to ensure that the world – from China and India to Latin America and Africa – stays on its economic growth path.

The infrastructure gap

Some may argue that infrastructure programmes are too dependent on the good intentions of politicians who rarely deliver on their promises. The cynics have a point. Investors would do well to avoid reliance on infrastructure ‘concepts’ such as Donald Trump’s spending plan, which has yet to come to fruition, or China’s ‘One Belt, One Road’ policy where national ambition is the driving force; investors would be better served by focusing their attention on companies with existing physical infrastructure assets and growth opportunities irrespective of government initiatives. Why? Because physical assets provide significant barriers to entry and generate long-term cashflows which are stable and growing. We also believe that these companies will be at the forefront when the infrastructure gap is addressed, and best placed to earn a financial return on the required capital investments.

We would also argue that infrastructure as an asset class benefits from long-term themes which will outlast electoral cycles and political rhetoric. Renewable energy, transportation of the future, urbanisation, universal connectivity, water and waste management, social and demographic shifts – these structural trends are enduring in our view, and we believe that the beneficiaries of these tailwinds can reward investors with compelling returns in the stockmarket over the long term.

It is also clear that these themes are global. It is therefore critical that investors pursue a global approach to reap the benefits of infrastructure to the full.


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