Is the $15 trillion infrastructure gap an opportunity?
Audrey Goh Senior Cross Asset Strategist, Wealth Management Group
10 Jun 2021
After COVID-19, major governments have had to bring forward long-term infrastructure spending plans. How can investors benefit?
Public amenities – from clean tap water to well-functioning electricity and internet connections, roads and bridges – often referred to as infrastructure by economists – are critical for the world’s economic and social development.
COVID-19 has thrown a spotlight on the deficiencies in global infrastructure development. An estimate by the Global Infrastructure Hub (a G20 forum initiative) forecasts a cumulative investment gap of USD 15 trillion by 2040 across the telecommunication, transport, energy and water sectors. This is partly because of the historical tendency of governments and businesses to underinvest in infrastructure as it usually involves large upfront capital and takes years, if not decades to pay off.
As a consequence of COVID-19, major governments have had to bring forward their long-term spending plans for the development of infrastructure, as the pandemic exposed deficiencies. The expected increase in government spending will boost associated sectors such as building and construction; clean energy; metals and other raw materials.
In the coming years, we expect three broad areas of focus across major government spending programmes:
- Traditional infrastructure – to build and upgrade roads, railways and other transport networks; real estate; and water infrastructure.
- Clean energy – to accelerate the adoption of renewable energy, including upgrading electricity grids to enable them to tap more efficient and cleaner energy sources; electrify transport networks; support sustainable farming and circular economy initiatives.
- Digital investments – to invest in high speed 5G networks, cloud computing, data centers and develop advanced applications that help productivity e.g. artificial intelligence and autonomous driving.
How can investors benefit from the coming infrastructure boost?
Traditional infrastructure spending is likely to form the bedrock of a post-pandemic recovery. Building and construction-related activities will drive demand for metals, energy, equipment and other raw materials. This should benefit the more cyclical equity sectors, such Industrials, Materials and Energy. Financial sector equities should also benefit as greater financing demand and modestly rising interest rates lift bank revenues and profit margins.
The shift towards clean energy, underpinned by a growing interest in environmental issues among stakeholders and support from regulators, offers another opportunity for investors. More than 110 countries, including China and the United States, have committed to decarbonise their economies by 2060. The power and transport sectors, which collectively accounts for over 50% of carbon emissions today, will have an important role to play in this transition. Renewable energy and its related supply chain, including technologies which can help industries to decarbonise and become more energy efficient, are likely to be key beneficiaries. US President Joe Biden’s proposal to increase and extend tax credits to renewable energy production is likely to accelerate this trend.
The buildup of the renewable energy infrastructure tends to be metal intensive. This is likely to boost demand for metals, including copper, steel, aluminum, and rare metals, driving commodity prices higher.
Electric vehicles (EV) are another potential growth area for investors, with more than 20 countries proposing to ban the sale of vehicles powered by internal combustion engines by 2030-40. The prospects are bright: total electric and hybrid vehicles penetration in the overall automotive market is expected to grow over five-folds by 2030, from less than 10% in 2020. EV supply chains and related charging infrastructure are also likely to benefit from this trend.
Finally, investments to upgrade digital infrastructure and install new digital assets will continue to underpin demand for advanced semiconductor chips, sensors, and cloud infrastructure as governments try to sustain their technological dominance and keep their industrial sectors competitive.
We expect the rise in infrastructure spending to benefit economic growth over the coming years in two ways. First, by directly boosting demand for goods, services and workers as a result of more construction activities. Second, and more importantly, by boosting the economy’s long-term growth potential, since better infrastructure lifts productivity throughout an economy: good quality roads, railways and internet connections make it easier, cheaper and faster to transport goods, services and information, supporting economic progress.
In conclusion, the COVID-19 pandemic has made the world’s infrastructure deficit glaring. We see the global response, including the ensuing boom in infrastructure investment, as positive for multiple stakeholders. Investors have a critical role to play in financing this infrastructure gap – the opportunities are vast and exciting.