Tackling infrastructure investment, part one

This is part one of a two-part series, which looks at current infrastructure measures, risks and opportunities. Part two will discuss portfolio positioning.

Listen to the full podcast on AdvisorToGo.

Across North America, infrastructure investment is a hot topic. Even though projects take years to get off the ground, the process of building and improving facilities like roads and bridges creates jobs.

Domestically, Prime Minister Trudeau has promised to spark economic activity through an infrastructure boost of $186.7 billion in funding over the next decade. But a recent Parliamentary Budget Officer report says that since Trudeau took office, little has been achieved and there’s “only limited visibility on tracking how the [New Infrastructure Plan] money is being spent.”

In the U.S., President Trump has raised the profile of infrastructure investment. Now, “citizens understand that infrastructure is the backbone of the economy, providing central services such as energy, water, transportation and communication,” says Larry Antonatos, a managing director and portfolio manager with the Public Securities Group at Brookfield Asset Management in Chicago.

Antonatos, whose firm manages the Renaissance Real Assets Private Pool, adds that “reliable and well-functioning infrastructure supports economic growth, while poor infrastructure limits economic growth. There is a lot of room for improvement in infrastructure.”

Three of Trump’s goals would benefit infrastructure projects, he explains. Here’s a look at each:

1. More fiscal stimulus. “Infrastructure is a terrific way to implement fiscal stimulus for two reasons,” Antonatos says. “First, the construction of large-scale infrastructure projects requires significant material and labour inputs, creating high consumption and many jobs; and second, when construction is complete, the ongoing operation of infrastructure supports economic activity to improve productivity.”

Takeaway: Consider whether infrastructure projects are funded through the government or public-private partnerships. That impacts investment opportunities.

For instance, high-quality transportation infrastructure ensures more efficient movement of both raw materials and finished goods along the supply chain—from mines to factories to consumers.

Trump’s plan aims to fund infrastructure through public-private partnerships, or P3s, says Antonatos. That way, “investors, not the government, will fund these […] investments.” As a result, “listed infrastructure companies may have the potential for more investment opportunities through more projects to build, own and operate.”

Plus, the private companies that invest will receive a benefit, adds Antonatos. “Trump will incentivize infrastructure investment through a deficit-neutral system of tax credits. So, listed infrastructure companies will receive tax credits for the investments they make.”

2. Reduction of red tape. Reducing regulation would also boost the infrastructure space. “Trump intends to […] eliminate unnecessary regulations; this could translate into quicker approval for new infrastructure projects, which are typically large-scale, complex and subject to review by government agencies,” says Antonatos.

In particular, this would benefit “shovel-ready energy infrastructure projects,” says Antonatos, including “oil and gas pipelines that [have] been delayed under existing regulations.” Think of the Dakota Access Pipeline and the Keystone XL, for which the president signed executive orders in late January.

Antonatos says fewer roadblocks could also be positive for real estate projects.

3. U.S. energy independence. Trump’s goal to eliminate the need for OPEC is also significant. “This policy [would] accelerate the production of oil and gas in the U.S., increasing demand for existing pipelines and creating demand for new pipelines,” says Antonatos. It would be positive for all areas of the energy sector, he adds, “including exports and production, refining and oilfield services.”