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Written by Kris Wrenn – Senior Financial Adviser
In the investment world infrastructure is considered a sub-sector of the asset class that is Property. Historically property funds or the “property component” of say, a Balanced fund option, was predominantly invested in commercial premises, often just mirroring the AREITS index. Nowadays there are increasingly more infrastructure options becoming available and platforms will usually segregate and distinguish the infrastructure component in their summaries/reports.
In terms of growth assets, Infrastructure can be an important form of diversification, namely away from equities. Unlike equities, which are obviously volatile in nature, infrastructure projects can take several years to come to fruition and therefore tend to be less volatile, and also do not necessarily move in tandem with the share market/s. They are “growth assets” but arguably more predictable … e.g. they are unlikely to leave a toll bridge half-built!
According to a major study performed by McKinsey they believe the world has a $5.5 trillion “problem” in the form of needed infrastructure. Roads that are crumbling, airports not big enough to receive the required quantity of planes, inefficient or non-existent railway networks, etc. The main reason that this problem has come about has been Covid, and the fact that most Government resources have been directed at their healthcare systems to combat the virus, and also at stimulus packages to prop up their economy.
It is my belief that Governments around the world including our own will continue to increase their focus on infrastructure spending over the next few years. In Australia with the cash rate at almost zero it is near impossible for the Government to use monetary policy to revive the economy. Likewise the relief packages (hand-outs) have come to an end. Furthermore, infrastructure spending is a fantastic self-perpetuating form of stimulus. In the short-term it provides jobs to thousands who in turn spend their wages and benefit other sectors. But in the long-term, with improved roads, railways and airports it also means improved efficiencies; employees get to work on time and supplies are transported quicker.
Although covid may have impacted Government expenditure on infrastructure on the plus side, due to the increased numbers working remotely, it has increased the need to upgrade digital infrastructure, e.g. fiber networks, telecommunication towers and data centres. Also, the rising trend of investing in sustainable products has driven infrastructure relating to cleaner waterways and cleaner energy production. In fact Japanese company KKR (soon to be majority owner of Colonial First State) has recently devoted $1.4 billion to renewable energy by acquiring a large portfolio of wind and solar assets from NextEra Energy.
What is Australia doing? Answer, quite a lot! They are currently investing a record $110 billion towards transport infrastructure, to be spent across the next decade. This includes;
- Canberra – an additional stop for the Canberra Light Rail project
- NT – Central Arnhem road upgrade
- Tas – Tasman highway to pass over Holyman Avenue
- QLD – Upgrade Pacific Motorway between Varsity Lakes an d Tugun from 4 to 6 lanes.
- VIC – Upgrade and widen the M80 Ring Road
- SA – A new 1.8km six lane non-stop motorway
- WA – Upgrade the Tonkin highway
- NSW – Westconnex; 33km of motorway to link W and SW Sydney with the city and Kingsford smith airport.
With Governments focusing on both the practical and economic effects of covids of covid much needed infrastructure has gone overlooked in the last 12 months. Coinciding with this has been lower than average returns from many infrastructure based investments, which now may arguably represent a good buying opportunity. Many Governments are already committing to large infrastructure stimulus packages and the effects of this will hopefully be seen across the next few years.
If you wish to discuss how infrastructure could form a part of your investments speak to a Hudson adviser by calling 1800 804 296 or click here to submit a form.