25 Apr 2019
Infrastructure: The building blocks of your portfolio
By: Sean Young, Portfolio Manager, Sasfin Wealth
Conceptually, infrastructure is one of the earliest forms of investment throughout human history and it has been the foundation of any successful civilization or economy. Despite this, it is the newest listed asset class globally with the first infrastructure indices achieving their 10-year anniversary in 2018 leading to their increasing use by retail investors.
The last decade of global growth since the global financial crisis has been driven predominantly by monetary policy, however even in most developed markets, infrastructure maintenance and especially new projects have lagged the population and economic growth by a staggering margin over the long term. The world is changing faster than ever before in the way we consume resources, the way we commute, the way we shop and just the way we live from day to day. One common theme emerges through all these trends, we are going to need a lot more infrastructure.
Trump’s clarion call
US President Trump’s 2016 election campaign was won on three core messages, namely; tax cuts, healthcare reform and to “Make America Great Again” which is heavily linked to repairing the country’s infrastructure. The third goal required the most urgent attention. According to the American Society of Civil Engineers (ASCE) most recently published annual report; 40% of the US’s 614,387 bridges are over 50 years old, 9.1% were declared structurally deficient in 2016 and alarmingly, 188 million trips are made across one of those deficient bridges every day. The average age of the 90,580 dams in the US is 56 years: 15,500 of these have been classified as high-hazard and 2,170 as deficient high hazard due to lack of investment. Kristina Swallow, 2018 president of the ASCE, summarises the extent to which poor infrastructure affects the lives of Americans as follows: “It’s hurting our economy, it’s hurting our communities’ ability to grow, it’s hurting our quality of life, and in some cases, there are public safety concerns.”
Since the mid-term elections in late 2018, it seems the only issue both the GOP and Democrats agree on is ensuring infrastructure investment is a top priority. Notwithstanding a few arguments over the cost of certain wall, Peter DeFazio, Chair of the Transportation & Infrastructure Committee, confirmed that he would like to introduce a US$500bn infrastructure bill in 2019.
Water scarcity and how to deal with it
Another primary theme driving our global infrastructure asset allocation is peak water, and our belief that water will be the “oil of the 21st century”.
Water scarcity is a pressing global human issue. Presently, over two billion people have no access to proper sanitation and 768 million people have no access to clean drinking water. According to the WEF, 50% of the world’s population will be living in conditions of “water stress” by 2030, and 40% in “severe water stress” by 2050.
Investors need to go blue. Water is a US$600bn market today and is delivering a compounded annual growth rate of 7% which is well above global growth rates. It is forecasted by 2020 to be a US$1tn industry. From an investment perspective, there are four entry points for investors related to water, namely; 1) Treatment 2) Management 3) Infrastructure and Supply 4) Water Friendly energy.
According to Citigroup, globally, up to $7.5 to $9.7 trillion of investment is needed to meet demand for water and sanitation related equipment. Urbanisation effects on water demand are more pressing every year and it is forecasted that by 2030 up to five billion people will be living in cities.
Due to governments around the world already being highly indebted coupled with a trend of downward pressure on tax rates, private capital is needed which creates the opportunity for retail investors. In conclusion, an allocation to infrastructure provides a real inflation hedge, an attractive dividend yield, very effective diversification and exposure to multiple growing global trends that your portfolio’s future returns can be built on.