Imagine if your child came home with a report card full of Cs and Ds. You might be a little concerned! But that’s exactly what our country’s infrastructure has “earned.” A new bill moving through Congress has, if passed, earmarked trillions of dollars to shore up this infrastructure which could present a range of opportunities for investors. Improvements and repairs in areas such as roads, dams, bridges, broadband and water, means companies directly or indirectly involved in these areas could see significant impact. This month, we focus on why incorporating investments in our country’s infrastructure might make good strategic sense for your long-term financial goals.
The country’s infrastructure has needed serious attention for a while. The 2021 Report Card for America’s Infrastructure assigned a C- to the current state of infrastructure in the country, while the American Society of Civil Engineers give it only a D+.
How does infrastructure relate to investing? Trillions of dollars are needed in all aspects of infrastructure, the rebuilding of which is an important foundational pillar for our country’s economic health. The country’s infrastructure is its assets—its bridges, energy, highways, roads, sewage systems, and water. The US economy relies on these assets every single day. And the need to shore up the nation’s infrastructure has a definite impact on investors and wealth management.
But first, let’s look at the state of health of some assets in the country’s “infrastructure portfolio.”
We rely on 2.2 million miles of pipeline to carry drinking water throughout the country. Yet a water main breaks about every two minutes, and we lose an estimated 6 billion treated gallons of water each day. (At the same time, we have a water shortage in many areas of the country.)
Over 40% of the country’s roads are in pretty poor shape—and motorists pay an annual average of $1,000 each in wasted time and fuel while navigating repairs. To add insult to injury, these deteriorating roads generate nearly $130 billion in costs to repair vehicle wear and tear.
Of the more than 617,000 bridges in the US, 42% are 50 years old or older and engineers have rated 46,154 of them in poor condition. These structurally deficient bridges see 178 million trips across them every single day.
If your financial portfolio showed similar numbers, what would you do? Hopefully, you and your advisor would have taken note much sooner and taken steps to mitigate and reverse the struggles.
The current administration has announced a $1.2 trillion Bipartisan Infrastructure Framework bill—the largest long-term investment in infrastructure in nearly 100 years—to improve public transportation, repair and rebuild roads and bridges, facilitate access to reliable high-speed internet, upgrade power infrastructure, and much more.
A Potential Opportunity for Investors
The infrastructure bill, should it become law, offers many investment opportunities. While it’s a little early to predict with certainty which sectors will benefit, likely contenders include the basic materials, industrial, technology, transportation, and utility industries. Each of these industries will play a role in the construction and renovation of nearly every area identified as needing critical attention including:
- Drinking, storm and wastewater
- Hazardous and solid waste
Some experts suggest investors should explore specific opportunities within traditional industries because they include a broad range of companies.
Investors involved with environmental, social, and governance (ESG) funds may also see benefits. According to Morningstar data, in 2020, investors dedicated $51.1 billion of new net money into ESG funds. For the past three years, three in four sustainable funds ranked in the top half of their investment category. Investors wanting to promote social good can choose to invest in ESG funds which tend to invest in energy firms not reliant on fossil fuels. Other ESG funds invest in companies committed to promoting other socially conscious movements like racial and gender diversity.
A caution, however. Should the infrastructure bill pass, spending will be allocated over many years, so benefits won’t be immediate. The stock market did, however, respond positively to the president’s announcement of the $1 trillion infrastructure package in June.
Benefits to Investing in Infrastructure
Infrastructure tends to be a long-lived asset, which complements younger investors seeking longer-term investments. Infrastructure investing does offer some attractive financial characteristics for investors as well as companies receiving the investment, including:
- Predictable, steady cash flows for companies because assets are often accompanied by a contracted and regulated revenue model (like a newly-constructed water treatment plant that includes a government contract to run for 15 years).
- A favorable risk/reward, since returns are typically high relative to their level of risk for the same reason that cash flows are steady. Government regulations or long-term contracts offer protection and assurance.
- Modest interest-rate sensitivity over the long term. While infrastructure investments may react — in the short term — to rising interest rates, historical data shows the relatively quick rebound of infrastructure investments, which weather rising rates well.
- Economic-cycle stability, since the country relies on its infrastructure assets like bridges or roads, and they’re used regardless of the state of the economy.
Learn more about the potential benefits of investing in our country’s infrastructure and whether incorporating it into your current investment strategy makes sense for your long term financial goals. Whether you’re just starting out, or seeking to diversify and reduce risk, Trust Advisory Group can help. Please contact us to learn more.