What’s behind the global push to upgrade infrastructure?
Old age and economic costs: Many of the roads, railways, bridges, power plants and other critical assets that we use every day were built decades ago and are showing their age. Simply put, we have a lot of catching up to do to if our infrastructure is going to be able to meet demand today and into the future.
Overstretched, antiquated infrastructure not only poses safety risks but has economic costs tied to lost productivity and other factors. Flight delays alone cost the U.S. economy billions of dollars every year, according to a report by the Council on Foreign Relations. According to the Society of Engineers, there is a water main break every two minutes and 43% of our public roads are in poor or mediocre condition.
The rise of emerging markets: While infrastructure investments in the US have lagged, developing economies – China in particular – have been on an infrastructure spending spree. The massive investments have improved lives, lifted economies and intensified geopolitical competition. Competition with China, whose Belt and Road Initiative has global reach, helped the Biden administration win rare bipartisan support for legislation that collectively allocates nearly $2 trillion to infrastructure and climate priorities.
Technological advances and green energy: Remote work, online shopping and other activities that involve the transmission and storage of data are creating a bigger need for digital infrastructure and energy to power it. The need is only expected to grow with the adoption of artificial intelligence. Spending on data centers alone is expected to reach $49 billion by 2030. To meet rising energy demand and climate goals, the public and private sectors will need to continue to invest in alternative energy sources (such as wind and solar farms) and upgrade power grids.
Real Computer / Electronic / Electrical Construction Spending (Indexed, Dec 2020 = 100)
Source: Kestra Investment Management with data from Census Bureau, FRED. Note: Construction
spending deflated by PPI – New Industrial Building Construction. Data from
January 2010 through April 2024.
What’s the scale of the worldwide infrastructure race?
According to research firm Kailash Concepts, current spending plans by a handful of economic powers dwarf the price tag of the U.S. Marshall Plan that revitalized Western Europe in the wake of World War II, as adjusted for inflation. Planned spending tied to the U.S. Inflation Reduction Act of 2022 and Saudi Arabia’s futuristic NEOM project is $870 billion alone, a whopping five times the size of the Marshall Plan in 2023 dollars, notes Kailash.
The Marshall Plan, CPI Adjusted vs Various Spending Programs ($bn)
Source: Kailash Capital, LLC
What does the spending surge mean for investors?
On the whole, it should stimulate economic growth and create investment opportunities.
A World Bank report found that infrastructure spending can have a multiplier effect, meaning that its economic impact is greater than the amount spent, particularly during recessions.
For investors, exposure to infrastructure, like other types of real assets, can add diversification benefits and inflation protection to portfolios. Here’s why:
· Real assets have a low correlation with other types of assets, meaning that their prices generally don’t move in tandem.
· They’ve historically produced better returns than the broader equity and fixed-income markets during periods of rising inflation, according to a Nuveen study. One reason: Many infrastructure assets have a direct tie to inflationary measures in their contracts or concessions, explains Nuveen.
Investors can gain exposure to infrastructure through sectors or companies directly or indirectly involved in the space, whether data center developers or cement producers. Municipal bonds – the source of more than 70% of state and local financing for infrastructure projects – offer another path. That said, investors with broadly diversified portfolios likely already have some exposure to infrastructure.
Not so fast
It’s important to keep current projections around infrastructure spending in perspective. Infrastructure spending tends to be lumpy and takes time to filter through the economy. It’s also subject to political whims.
So far, only a small portion of the roughly $1.6 trillion allocated to infrastructure and climate priorities under Biden-era legislation has been spent, according to an analysis by Politico. The upcoming presidential election also creates some uncertainty around future spending.
What’s more, major infrastructure projects are complex undertakings that don’t always go according to plan. And they can be disruptive. Boston’s infamous Big Dig, for instance, helped transform the city, but cost billions more than anticipated and took nearly a decade longer than expected.
Whether building a bridge or a portfolio, diligence, patience and a long-term perspective go a long way.
Invest wisely and live richly,
Kara
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