Biden’s US$2.3 trillion infrastructure plan
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:
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.
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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.