Tapiwa Ngwena, ETF Investment Strategist for SPDR, comments that recent events have brought an emphasis on infrastructure investment to the fore.
Tapiwa Ngwena, ETF Investment Strategist for SPDR, comments that recent events have brought an emphasis on infrastructure investment to the fore.
Ngwena writes: “Infrastructure investments have always been regarded by governments worldwide as essential to their economic growth and prosperity, creating much needed jobs. With the recent US election the emphasis on infrastructure spending has been brought to the forefront, which we believe makes this asset class appealing for investors who want to play this theme.
“After nearly seven years of monetary policy being the only game in town, its effectiveness has started to wane. The focus is shifting to an increased role for fiscal spending in order to reignite global growth. The US election highlighted the willingness of certain politicians to now embark on fiscal spending, namely on infrastructure to invest in longer-term growth.
“Infrastructure assets are the basic physical systems of a nation and they are vital to a country’s economic development and prosperity. However, the global financial crisis has led to an imbalance between infrastructure needs and funding. The OECD estimates global infrastructure investment requirements of USD50 trillion by 2030. The need for infrastructure varies across regions, with emerging markets facing a different set of challenges to those in the developed world.
“The infrastructure asset class generally has long-duration assets that elicit stable and predictable cash flows. High barriers to entry and monopolistic business models, paired with inelastic demand for essential services provided by infrastructure companies, result in predictable revenue that is often indexed to inflation. Furthermore, the two main revenue drivers, pricing and volume, have particular characteristics within this space. Prices are generally tied to long-term contracts and/or regulation, and are often adjusted with inflation. Volume tends to be steady and growing due to inelastic demand, efficiencies of scale, and increased GDP growth. Hence, in periods of rising inflation, infrastructure investments act as a real asset. Additionally, in times of economic contraction, these businesses tend to have defensive characteristics, since they are relatively insulated due to stable demand irrespective of the economic cycle."
Ngwena concludes that accessing infrastructure through an ETF offers a regulated, open-ended vehicle and could also help larger investors who have an allocation to direct infrastructure, by offering a temporary home for committed, but uncalled, capital. Ngwena writes: “An ETF structure is no substitute for direct investment in infrastructure, and it still carries risks associated with large capital projects, whose failure could damage the issuer. Nevertheless, low capital requirements, higher levels of liquidity, and project and issuer diversification make it an attractive part of the infrastructure tool kit.”
