Building a new world: profit from the global post-Covid infrastructure spending spree
The crisis is far from over, but many of the world’s largest economies are already looking to the future, and the odds are that infrastructure spending will be key to the recovery. Matthew Partridge investigates.
Have we passed the peak of the pandemic? The numbers of infections and deaths are dwindling. However, the economic fallout is likely to persist for a long time, even after lockdowns are relaxed. While this is bad news for some sectors of the economy, such as hospitality and retail, it also provides opportunities for others. One key beneficiary of the post-coronavirus world, in which governments look set to embark on a spending spree, should be infrastructure.
From support to stimulus
Government spending has hitherto focused on measures “to prevent firms going bust”, says Shaniel Ramjee, senior investment manager with Pictet Asset Management. This is understandable given that reducing the number of bankruptcies “gives the economy the best chance to minimise structural damage”; bankrupt firms “no longer employ people [or] contribute to economic activity”. Wage support measures and job retention schemes, such as the UK scheme that pays 80% of the salaries of those furloughed by their employer, will temper any surge in unemployment, thus bolstering consumption.
However, policymakers are beginning to realise that such measures are, at best, a short-term sticking plaster, not a long-term solution, with a growing realisation that merely “returning to the normal pace of activity will not be enough to regain lost growth”. While money-printing was the preferred policy option during the last crisis, this time it is likely to be complemented by an aggressive fiscal policy in order to “stimulate demand more effectively”.
Plenty of bang for your buck
Viewed in this context, infrastructure spending is particularly attractive because it not only increases overall demand but also helps rectify the problems created by “decades” of under-investment. What’s more, it can “boost the underlying rate of economic growth through increasing productivity”. Studies certainly suggest that it has a beneficial effect on the economy’s long-term growth potential. According to the US Economic Policy Institute’s review of previous studies, every $100 spent on infrastructure boosts private-sector output by an average of $17 in the long run.
If governments are as serious as they claim to be about investing in infrastructure, then the spending is likely to cover a wide range of areas, says Mark Mobius of Mobius Capital Partners. For example, in the energy sector, solar and wind power projects could help speed the transition to a low-carbon future and help governments meet their targets to reduce emissions. High-speed railways and new underground systems could help move people towards public transport and away from cars. Finally, there is a strong case for spending on physical infrastructure ranging from “bridges to school buildings”.
This all bodes very well for the companies involved in the sector, says Mobius. These include the major engineering and construction groups “capable of planning and executing large projects”. Companies that “supply the tools and equipment required to execute such projects” also stand to make money.
Where Asia will spend its money
Asia was the first part of the world to both experience the coronavirus and contain it, says Freya Beamish, chief Asia economist for Pantheon Macroeconomics. So, it should come as no surprise that they are ahead of the game when it comes to infrastructure spending. China famously chose to respond to the recession that followed the financial crisis of 2008 with a blitz of infrastructure spending “so successful” that growth rapidly eclipsed pre-crisis levels.
For now it seems the Chinese government isn’t going to be launching a package quite on the scale of 2008-2009. Still, there is plenty of evidence that Beijing’s plan to compensate for the “huge drop-off” in external demand will involve much extra infrastructure investment. The Chinese government has been historically reluctant to reveal the specific detail of its spending programmes, which makes it difficult to gauge how much is being spent. Still, state newspapers are already talking up the new infrastructure projects that have been announced.
Meanwhile, local governments “are also issuing a lot of special infrastructure bonds”, typically a sign that they are swinging into action since these bonds apply specifically to infrastructure. Survey data appears to confirm this, with the construction sector the “star performer” in recent surveys of economic activity.
With China running out of “rail, road and bridge” projects to invest in, Beamish expects the latest round of Chinese spending to focus on digital and environmental infrastructure, especially given mounting popular anger at high levels of pollution, which officials are worried could feed through into more general discontent.
Japan “has also carried out a lot of infrastructure projects in the past”, says Beamish. Indeed, it has probably overinvested, with many projects producing little or no economic benefit and increasing Japan’s national debt, leading some experts to joke that they make as much sense as “paving Mount Fuji”. Still, she thinks that there “will definitely be more infrastructure spending” as it “always looks good for politicians to be associated with big public projects”. South Korea is also likely to be a “big spender” in this area over the next year too.
India, moreover, has already indicated that infrastructure spending will form a significant part of its current round of stimulus, says Ramesh Mantri of the Ashoka India Equity Investment Trust. For example, $13bn has been allocated towards agricultural infrastructure spending alone. Mantri also expects the crisis to prompt Indian prime minister Narendra Modi’s government to keep “stepping up” the amount that it spends on more traditional projects such as roads and power plants. Over the last few years investment in such areas has been gaining “serious momentum”. It is expanding at a rate of around 15% a year.
America is in desperate need of repair
With unemployment claims exceeding 25 million in the US since the start of May, infrastructure spending is an “obvious area where the federal government could deploy capital into a depressed economy”, says Jim Wright of asset management group Premier Miton. The precedent of the New Deal in the 1930s – when huge amounts of money were spent on projects such as the Tennessee Valley Authority in an attempt to combat the Great Depression – will also be attractive to both Joe Biden and Donald Trump, as they are “looking for vote-winning policies going into the November elections”. Just as the need to spend more on infrastructure provided “one of the few areas of consensus” between the two presidential candidates in 2016, both current contenders are likely to promise significant spending in this area.
One of the “most obvious” specific areas where money could be spent is transport, with most experts acknowledging that the highway and bridge network across the US is in “desperate need of repair and refurbishment”. However, investment in this area is complicated by the fact that control of the road network is divided between the federal government and states, cities and counties, each of which has their own priorities and interests. The partisan feelings generated by the upcoming elections, with both parties wary of doing anything that could be perceived as a “victory” for the other side, may also postpone any major transport spending until after November.
Still, Wright believes that the wrangling between the two parties will only postpone rather than preclude infrastructure spending, since the barriers to cooperation will disappear once the election takes place, irrespective of who ends up winning.
To read the whole of this article, subscribe to MoneyWeek magazine
Subscribers can see the whole article in the digital edition available here