Alex Araujo, fund manager, M&G Investments
Spend, spend, spend. Politicians are only too aware that investment in public services is popular, particularly in an election year. Given the parlous state of the global economy since the onset of the COVID-19 pandemic, fiscal policy is particularly significant this year.
Higher spending on infrastructure has been a key feature of fiscal stimulus packages in Europe, China and Japan, but it has been notably lacking in the United States – ironically, the country that probably needs it most.
The desperate need to repair, modernise and expand America’s ailing infrastructure is one of the few areas of common ground between Republicans and Democrats. The fact that Donald Trump has been unable to implement a much-needed infrastructure plan during his presidency has been a source of frustration for both sides.
The infrastructure gap
Infrastructure plays a crucial role as the backbone of the US economy, yet a prolonged period of underinvestment in essential services – from water and electricity to highways and airports – has left its critical assets creaking at the seams.
According to the American Society of Civil Engineers, the US spent just 2.5% of GDP on infrastructure in 2019, down from 4.2% in the 1930s. It estimates that the shortfall in infrastructure investment between 2016 and 2025 will reach US$2 trillion.
Government spending on transport and water infrastructure has been on a downward spiral for several decades, reaching a 55-year low in 2017 as a percentage of GDP.
This is not just a matter of inconvenience, but public safety. Examples of unsafe drinking water, pollution-laden traffic congestion and decaying road infrastructure highlight the need for prompt investment.
There is another key reason why infrastructure is high on the presidential agenda: workers are voters. Infrastructure is a key employer in the world’s largest economy. The 17.2 million employed by the industry are about 12% of the whole US workforce – more than retail, education or manufacturing.
Supporting and creating jobs will be key to the economic recovery and infrastructure has a central role to play – again, this is uncontentious among the political parties.
Greener on the other side
The two sides differ greatly on climate change, however. While President Trump famously pledged to withdraw the US from the Paris Agreement in 2017, Biden has been promoting a green agenda.
The Democrat’s plan ‘to build a modern, sustainable infrastructure and an equitable clean energy future’ comes with two specific targets: net zero carbon emissions by 2050 and US$2 trillion investment in infrastructure during his presidency.
Regardless of whether Biden wins, private enterprise and regional utilities are already investing in green opportunities. The potential for renewable energy deployments in the US is enormous compared to other parts of the world. With renewable energy capacity only half that of Europe and dwarfed by China, the US has some catching up to do.
Multi-decade growth opportunities
Higher infrastructure spending in the US provides a potential tailwind across the spectrum of infrastructure sectors. That said, the attractions of the asset class do not hinge on US infrastructure programmes coming to fruition.
Renewable energy, clean transportation, digital connectivity, water and waste management, social and demographic shifts are all enduring structural trends.
Take digital infrastructure, for example, whose critical importance came to the fore during lockdown, as millions of people were forced to work remotely and entertain themselves at home. Whether or not digital infrastructure features in fiscal stimulus packages, the proliferation of data in our increasingly digital world means the need for communication towers and data centres looks set to only rise.
We strongly believe that listed infrastructure benefits from powerful structural themes that can drive growth for decades to come, whatever the outcome of the 2020 election. In our view, this provides long-term opportunities for infrastructure companies and their investors.
The views expressed in this document should not be taken as a recommendation, advice or forecast.
M&G are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.
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