Will Trump and May make 2017 the year of infrastructure?
Recently anointed Prime Minister Theresa May has set out her stall as a different kind of Conservative leader. She has hinted at Government intervention in markets which it judges are failing consumers and proposed strengthening corporate governance arrangements in the private sector.
And with policymakers desperate to boost economic growth, particularly in the wake of the EU referendum result, the Treasury – under the new leadership of Chancellor Philip Hammond – also looks set to put rocket boosters under infrastructure investment.
The Government has already established an independent ‘National Infrastructure Commission’ tasked with helping “plan, prioritise and ensure efficient investment” in UK infrastructure.
The announcement is intended to build on £100bn of infrastructure spending commitments made during this Parliament, the Treasury says, with spending on transport alone set to hit £61bn.
The UK’s infrastructure spending plans also compare favourably to its European counterparts, according to accountancy firm PwC, with the country’s share of total spending across the continent set to rise from 22% in 2014 to 23% in 2025.
Furthermore, Donald Trump’s shock election to the Oval Office could well provide a boost to the sector. The former US Apprentice host has promised to pump billions of dollars into infrastructure projects that could benefit UK companies.
There are several reasons why the Government has turned to infrastructure to ignite growth. Firstly, commissioning big projects will provide a short-term injection to the economy by directly boosting the firms that win the contracts – perhaps encouraging them to hire more staff, or at least delay any planned cutbacks.
Secondly, investing in infrastructure should boost the long-term productivity of the UK – assuming the roads, rail and airport capacity are needed of course.
Thirdly, many would argue the UK’s economic arteries have suffered from chronic underinvestment, particularly in the wake of the 2007/08 financial crisis. Education infrastructure spending was 18% lower in 2014 than in 2009, according to accountancy firm PwC, while annual road spending fell from an average of £4.9bn between 2006 and 2009 to £3.7bn from 2010 to 2014.
And finally, the Government can finance these projects cheaply at the moment, with interest rates sitting at just 0.25%.
Where is the Government investing?
Crossrail 2 is an obvious example of the UK’s renewed infrastructure investment drive. Once complete, the project should add capacity to the regional rail network in London and the South East, cut journey times and support economic regeneration through the creation of 200,000 new jobs and 200,000 new homes. These additional benefits are also a key attraction for policymakers aiming to get the biggest bang possible for taxpayers’ bucks.
And it’s not just on the ground where capacity is set to expand. A third runway at Heathrow Airport has finally been given the green light by the Government, a move that again should provide a fillip to the economy in both the short term (once construction begins) and the long term. The Airports Commission estimates the move will eventually boost the UK as a whole by some £211bn.
Energy is another target for policymakers attempting to secure the UK’s future supply. The Government recently gave the go-ahead for the French, through EDF, and the Chinese, via the CGN group, to invest in the £18bn Hinkley Point power station in Somerset. In fact, investment in power generation rebounded from a 25% fall between 2008 and 2010 to reach £9.7bn by 2014 and is forecast to reach £26.6bn by 2025, according to PwC.
The UK is also, as things stand, set to miss its 2020 target of delivering 15% of energy from renewable sources, so ministers could well face pressure to use subsidies and tax incentives to encourage more firms to invest in low carbon technology, such as wind farms and hydroelectric power generators.
How to tap into infrastructure
There are two obvious ways for advisers and clients to back UK infrastructure – by investing directly in companies that are set fair to benefit from the Government money sloshing around, or buy into an investment fund or trust that targets the sector.
For many buying direct equity in a company will be the most attractive way to get a piece of the infrastructure action. National Grid and building supplies firm Wolseley are examples of firms that could benefit from increased spending from Governments on both sides of the Atlantic. However, as is always the case when investing in a single asset, you’ll be leaving yourself open to significant risk should the firm run into trouble.
Alternatively, advisers and clients could tap into the market by investing in infrastructure funds, such as the Lazard Global Listed Infrastructure and First State Global Listed Infrastructure. The former takes a global approach and currently has about a third of assets exposed to the US, so may benefit if President Trump bolsters infrastructure investing stateside.
The First State fund, meanwhile, has 50% of assets exposed to US infrastructure with exposure to themes such as railroads and energy.
For many paying a fund manager will be the most desirable route as it allows investments to be split across a broad spread of projects and providers, significantly reducing risk.
With billions of pounds of Government money on the table, advisers and clients could be forgiven for thinking infrastructure is a sure thing. However, it’s worth remembering that this isn’t a market where you’re likely to make a fast buck – investing in infrastructure is very much a long-term play, particularly when you’re buying into individual companies.
An overreliance on Government help – particularly through tax breaks or subsidies – should also make investors wary. Even Neil Woodford, one of the UK’s most respected fund managers, had his fingers burnt when the Government removed the Climate Change Levy exemption for renewable energy providers. The move hit one of his key holdings at the time – renewable energy firm Drax – and prompted the former Invesco man to pen a scathing letter to then Chancellor George Osborne.
And finally, advisers and clients should always scrutinise the fundamentals of any company they are investing in. Even in a market where funds are plentiful, a badly run business with weak cashflows and poor dividend cover can still let you down.
As a guide, fund manager Lazard prefers to target monopoly-like assets where returns are regulated and there is either explicit or implicit inflation pass-through. It cites toll roads, airports and broadcast towers as fitting the bill here.
On the flip side, the fund manager eschews firms operating in competitive markets where the fixed-cost structure is high and commodity prices are volatile. These include construction companies, airlines and telecommunication businesses.