Trump, Brexit and the Rise of Infrastructure Investment

Both Brexiteers and Donald Trump won their battles by promoting nationalism. Statements and claims were made by supporters and leaders of both campaigns that would have been unimaginable in the politically-correct world we enjoyed a mere 18 months ago.

Many people are now asking themselves, what has caused this phenomenon?

Whilst there are many reasons, there are a few fundamental drivers…

For example, globalisation saw first-world countries begin to look outwards. This resulted in the success of emerging economies such as China and Brazil. However, many believe that the price of the success of these countries was the destruction of its working class, with manufacturing, mining and other skilled manual work moving to cheaper, developing nations. The 2008 financial crisis and the West’s almost universal ideology of austerity drove working-class communities down even further, leaving many towns and cities, especially in the North, derelict and desperate.

The shift to nationalism is also potentially rooted in a developing human tribal urge to look after ourselves first which ultimately means looking inwards, perhaps by focusing on nation rebuilding and creating new, improved infrastructure. This could indeed provide incredible opportunities for investors and pension funds looking for stable, low-risk investment opportunities in a rocky economic and political climate.

Donald Trump has pledged to spend $US1 trillion over the next decade to make America’s infrastructure “second to none”, (although this sum will be dwarfed by China, which has spent $US1.4 trillion on roads, telecommunications, bridges and other infrastructure this year alone).

Across the pond, Theresa May and her Conservative Government are dumping austerity in favour of spending. Since she took office in July, Ms May has approved a third runway at Heathrow airport, the development of a nuclear power plant at ‘Hinkley Point’ and confirmed that the controversial ‘HS2 railway project’ will go ahead.

This week it was announced that Downing Street and the Treasury are drawing up proposals to raise billions of pounds through new “infrastructure bonds” and the plan could be unveiled in the Government’s Autumn Statement later this month, in which infrastructure is expected to be a central theme.

The policy is seen as a way to match private investors and pension funds with new transport and energy schemes.

One idea being discussed at a senior level in government is for National Savings to offer the new infrastructure bonds to private investors. Another plan being floated is setting up a state-owned British Business Bank as a way to, a) fill the gap when Britain loses access to the European Investment Bank and b) help fund new construction projects by diversifying the risk for investors.

According to the Financial Times, a group called ‘The Infrastructure Forum’ has urged the government to issue up to £100 billion infrastructure bonds to cover major new projects: “This would help compensate for any future removal of European Investment Bank funds for infrastructure schemes,” it said.

This structure has already been approved in Canada, with its Government announcing plans last week for its own National Infrastructure Bank aimed at attracting private capital into public infrastructure.

Most of the funds invested in this sector are investment trusts, many of which invest directly in Private Finance Initiative (PFI) projects and public-private partnerships where private companies are contracted by governments, in Britain and abroad, to build and manage roads, bridges, hospitals and schools. These are often long-term government contracts, sometimes 25 years long that offer an element of inflation protection regardless of demand meaning that returns are relatively predictable.

At present, yields are quite impressive, between 4% to 6% alongside a government dedicated to increasing infrastructure spend.

Although investing in infrastructure offers more stable returns than say the wider stock market, the sector is not risk free. Due diligence is required before sinking major capital into a project or trust.

’Payment for use’ projects such as toll roads can suffer during an economic downturn and returns may not necessarily correlate with inflation (which is widely expected in 2017). These types of investment also tend to disappoint. To name an example, traffic numbers of the M6 toll road near Birmingham have fallen short of forecasts because drivers have preferred the free alternative routes.

Furthermore, rises in interest rates can cause a fall in capital values. This is because the income on offer will look less appealing as the yields on other assets rise in line with the bank’s base rate. If you bought the fund as a safe, reliable investment, this could prove a shock even if the fall in capital is not severe enough to derail dividend payments.

Premium ratings of infrastructure investment trusts can also prove a trap for the unwary. Popular funds can quickly cost more than the value of its holdings and anyone who buys these funds now will be paying more for the assets than they are actually worth.

And let’s not forget political risk. Governments can make or break infrastructure investment and most funds invest internationally, so it is not just the UK political landscape investors must be aware of. Just as an example, investment in renewable energy made big gains in recent years. However, Donald Trump’s persistent anti-renewables rhetoric combined with his hostility to the Paris accord to tackle climate change, led to large falls in share prices among wind and solar companies the day the US election result was announced. This occurred even among companies that do very little business in America such as Dong Energy (the Danish group that is the world’s leading operator of offshore wind farms, which operates mostly in the North Sea). Its shares fell by 2.5% last week.

Every change in the political and socio-economic trends brings its own opportunities. After years of crippling austerity, which clearly has not worked, renewed infrastructure spending may provide investors with a relatively stable base from which to build their portfolio.

We can work with you and your finance advisors to ensure that your investments are protected and you are advised every step of the way to allow you the opportunity to reap the benefits of the changes happening around you.

Saracens Solicitors is a multi-service law firm based opposite Marble Arch on the North side of Hyde Park in London. We have years of experience advising and undertaking due diligence for investors and high-net-worth individuals. For more information, please call our office on 020 3588 3500.