Biden’s US$2.3 trillion infrastructure plan

Russel Chesler

VanEck Australia

Recently President Biden unveiled his US$2.3 trillion infrastructure plan. The plan aims to revitalise US transportation infrastructure, water systems, broadband and electricity grids among other goals. But a significant funding gap remains for infrastructure and we are positive on the long term case for infrastructure assets in a portfolio.

Historically low interest rates in the developed world and the need to boost economies post-COVID are being attributed to massive increases in infrastructure spending around the world.

In terms of the funding gap, it is estimated that some US$94 trillion will need to be spent by 2040 to address the world’s infrastructure needs as populations grow and change. So developed world spending on infrastructure need to increase, even beyond what we saw last year, when governments around the world responded to the COVID-19 pandemic by opening their cheque books and running up huge deficits in an effort to stimulate economies.

Figure 1: Value of COVID-19 fiscal stimulus packages in G20 countries as of end of March 2021, as a share of GDP

Much of this investment has targeted infrastructure. For example, the Australian Government announced a $1.5 billion infrastructure package, the European Union’s €750 billion Next Generation recovery fund included a big infrastructure component and most recently, Joe Biden’s US$2.3 trillion infrastructure plan.

COVID-19 has been impetus for governments to address the significant underinvestment in infrastructure by the developed world over the past thirty years which has created an infrastructure deficit. It is estimated that US$94 trillion by 20401 needs to be spent on infrastructure to cope with growing populations, the changing demographics of populations including an increasing middle class, and changes in technology. The low interest rates environment is also encouraging investment.

The interest rate environment is also beneficial to listed infrastructure companies because they commonly employ larger amounts of debt in their capital structures to fund the projects of the scale, size and long-life they are involved. In the current low interest rate environment, we expect infrastructure companies to continue to take advantage of this historic scenario. Government spending is also creating potential new opportunities for listed infrastructure companies to co-invest alongside government or invest in place of governments.

Examples of debt raisings by global listed infrastructure in the past twelve months include:

  • December 2020 – SNAM raised €600 million
  • 9 September 2020 – Duke Energy raised US$650 million
  • 27 July 2020 – Kinder Morgan raised US$500 million
  • 5 May 2020– Nextra Energy raised US$2 billion
  • 1 April 2020– AENA secured €1.08 billion, increasing its available cash and credit to €2.5 billion.

Global infrastructure’s recovery has so far trailed equities

When markets retreated in March 2020, infrastructure assets were among the worst hit. While equities have led a recovery, listed global infrastructure has lagged and has still yet to recover to its pre-COVID level – see Figure 2.

Figure 2: 2020/21 comparative index performance

There is no doubt the significant global economic downturn has had an impact on valuations in the short term but the nature of most infrastructure assets is that they are long duration, often 30+ years. Additionally, there are some infrastructure assets such as mobile telecommunications that have not experienced much of a slowdown at all. As such, our view is that most infrastructure assets will not be derailed by a one-or-so-year of revenue shock and we remain positive on the long term case for infrastructure assets in a portfolio.

With financial market returns being so strong for most of the last decade, value opportunities have been hard to come by. Likewise, investors requiring income from their portfolios had a difficult time given the downward trajectory of interest rates. With most economies experiencing low or negative real rates and central banks using unconventional programs in order to stimulate their economies, income investors will have an even harder time as the economy recovers. Against this backdrop, infrastructure has been rallying recently as savvy investors recognise the value opportunity.

Global infrastructure stocks are returning to pre-COVID levels of financial performance and profitability as measured by the EV/EBITDA ratio – see Figure 3.

Figure 3: Global infrastructure EV/EBITDA

The low interest rate environment and demand for digital infrastructure and commitments from governments around the world has piqued investor interest in the asset class. We believe the monetary and fiscal response to COVID-19, attractive investment fundamentals and long-term structural thematics represent an opportunity for listed infrastructure.

One trade access to 140 global listed infrastructure securities

VanEck provides investors with the opportunity to access a portfolio of around 140 global infrastructure securities simply via a single trade on ASX. The VanEck Vectors FTSE Global Infrastructure (Hedged) ETF (IFRA) was the first global infrastructure ETF on ASX. IFRA gives investors access to a portfolio of 140 of the world’s largest infrastructure securities providing international diversification that replicates the well regarded market benchmark for global listed infrastructure, the FTSE Developed Core Infrastructure 50/50 Hedged into Australian Dollars Index.

VanEck Investments Limited ACN 146 596 116 AFSL 416755 (‘VanEck’) is the responsible entity and issuer of units in the VanEck Vectors FTSE Global Infrastructure (Hedged) ETF (IFRA). This is general advice only, not personal financial advice. It does not take into account any person’s individual objectives, financial situation or needs. Read the PDS and speak with a financial adviser to determine if the fund is appropriate for your circumstances. The PDS is available here. An investment in IFRA carries risks associated with: financial markets generally, individual company management, industry sectors, ASX trading time differences, foreign currency, currency hedging, country or sector concentration, political, regulatory and tax risks, fund operations, liquidity and tracking an index. See the PDS for details. No member of the VanEck group of companies guarantees the repayment of capital, the payment of income, performance, or any particular rate of return from any fund. IFRA (the Fund) is not in any way sponsored, endorsed, sold or promoted by FTSE International Limited or the London Stock Exchange Group companies (‘LSEG’) (together the ‘Licensor Parties’) and none of the Licensor Parties make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to (i) the results to be obtained from the use of the FTSE Developed Core Infrastructure 50/50 Hedged into Australian Dollars Index (with net dividends reinvested) (‘Index’) upon which the Fund is based, (ii) the figure at which the Index is said to stand at any particular time on any particular day or otherwise, or (iii) the suitability of the Index for the purpose to which it is being put in connection with the Fund. None of the Licensor Parties have provided or will provide any financial or investment advice or recommendation in relation to the Index to VanEck or to its clients. The Index is calculated by FTSE or its agent. None of the Licensor Parties shall be (a) liable (whether in negligence or otherwise) to any person for any error in the Index or (b) under any obligation to advise any person of any error therein. All rights in the Reference Index vest in FTSE. “FTSE®” is a trade mark of LSEG and is used by FTSE and VanEck under licence.

Russel Chesler
Head of Investments and Capital Markets
VanEck Australia

Russel is Head of Investments and Capital Markets at VanEck in Australia. An actuary with over 25 years’ experience in financial services, specialising in asset and wealth management.

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