The U.S. has an acute need for new spending on infrastructure; what impact could the U.S. election have on this issue? RARE Infrastructure weighs in.
Every four years, the American Society of Civil Engineers evaluates the condition and performance of America’s Infrastructure, assigning letter grades based on the physical condition and needed investment for the country. In 2013, the United States (U.S.) achieved a dismal score of D+, with the Society concluding that the U.S. needed to invest USD $3.6 trillion by 2020. Based on likely capital spending levels, the report warned of a USD $1.6 trillion shortfall.1
Given the strong need for repairs and upgrades, pledges around infrastructure spending have been a topical campaign issue in the upcoming U.S. presidential election. In fact, infrastructure spending is one of the few campaign topics that Hillary Clinton and Donald Trump have been able to agree upon.
Infrastructure spending: A fiscal consensus
In their proposed fiscal policy initiatives, both candidates have pledged billions in public funding towards improving aging infrastructure in the U.S. In particular, the focus has been on the improvement of U.S. roads and bridges. Detailed below are each candidate’s proposed infrastructure pledges.
- Clinton has pledged to increase federal infrastructure funding by USD $275 billion over a five-year period, alongside establishing a national infrastructure bank which will have the power to use bonds and guarantee loans issued by other lenders. By leveraging private capital in this way, the plan aims to generate up to an additional USD $225 billion in spending. Additionally, Clinton’s plan calls for universal broadband by 2020, and more focus on creating a clean energy grid. Clinton proposes to finance this plan by closing corporate tax loopholes.2
- Trump’s infrastructure pledge involves USD $500 billion of spending, financed through the issuance of new debt. Unlike Clinton, Trump is yet to articulate specific details around the use of the proposed funding. However, the campaign has emphasized support for traditional fossil fuel infrastructure.3
Implications of fiscal policy initiatives on utilities
Renewable and transmission growth are key points of Clinton’s energy plan. The Clinton campaign explicitly targets preserving and extending proposed carbon restrictions under President Obama's Clean Power Plan. The platform includes plans to grow renewables to a third of U.S. electricity generation by 2027 and grow solar capacity to 140 gigawatts by the end of 2020. To facilitate renewables growth, the Clinton platform highlights increased transmission projects and greater cooperation between federal and state/local level agencies. Renewable energy companies could benefit from Clinton’s energy plan.
The Trump campaign has not yet targeted specific policies that directly impact electric utilities. However, the campaign has emphasized support for traditional fossil fuel infrastructure. This may benefit utilities that have coal and fossil fuel generation fleets.
An important caveat to the discussion above is that campaign promises by either candidate will need to survive the U.S. congressional approval process.
Impact on US economic growth
Integrating expected future macroeconomic developments is key to RARE’s investment process as the value of infrastructure assets depends on economic growth, interest rates and inflation. While difficult to articulate, at a macroeconomic level, we have engaged with our external economic advisors to understand the impact an election win for either candidate will have on U.S. economic growth. It is anticipated that the proposed infrastructure spending of either candidate amounts to an additional 0.5% boost to U.S. Gross Domestic Product (GDP).
Oxford Economics, one of RARE’s economic advisors, have looked at the impact of each candidate's collective policy proposals on US economic growth. Should Clinton win, it is predicted that the economic impact would likely range from neutral to a modest positive boost. Should Trump win, it is expected economic growth could range from a modest slowdown to a recession within the first 18 months of his presidency.4
Impact on global equity markets
Broadly speaking, the global equity markets would view Clinton as status quo. On the other hand, Trump’s policies, due to their lack of clarity and transparency could lead to greater uncertainty and volatility in the financial markets. As such, it is difficult to price in the impact of a Trump win accurately. For instance, Trump’s trade plans which involve imposing trade tariffs of 45% on China, 35% on Mexico and amendments to the North American Free Trade Agreement, could lead to a recession.
The essential nature of infrastructure
Even though both candidates’ infrastructure spending promises have a minimal direct impact on private infrastructure investment, their proposed initiatives have raised overall awareness around the essential nature of infrastructure assets.
Infrastructure assets such as airports, rail, roads, electricity transmission and gas pipelines, provide essential services. People interact with these services every day, as their demand for water, gas, and electricity remains relatively constant. Irrespective of whether markets are in a boom or a bust phase, the revenues of many of these assets remain relatively stable. Importantly for investors, infrastructure assets are mostly long-dated, monopolistic assets that have historically provided stable and inflation-protected returns.
While the election outcome is unknown, the political acceptance for fiscal spending may be the much-needed catalyst to put the country's aging infrastructure back onto the road to recovery.
RARE’s approach to US infrastructure
At RARE, we focus on global listed infrastructure securities as we believe this may provide investors with liquidity as well as solid returns and income streams over an investment cycle of 3-5 years. Our focus is to identify and invest in companies listed on global stock exchanges that own and control the underlying infrastructure assets.
RARE takes a constructive view of the US economy. In line with this thesis, RARE continues to retain some exposure to more GDP-sensitive U.S. companies, in particular rail and communications stocks which are set to benefit from the increased economic activity. With respect to US Utilities, RARE’s constructive view on the US economy manifests in higher bond yields flowing through our U.S. Utility models over the medium term. U.S. Utilities have become incrementally more attractive given recent share price reductions across the sector.
1 2013 Report Card for America’s Infrastructure, American Society of Civil Engineers.http://www.infrastructurereportcard.org/
2 John Cassidy (2016). An Infrastructure Proposal that goes Beyond Clinton and Trump.http://www.newyorker.com/news/john-cassidy/an-infrastructure-proposal-that-goes-beyond-clinton-and-trump
3 John Carney (2016). Donald Trump Proposes $550 Billion in New Government Debt.http://blogs.wsj.com/moneybeat/2016/08/02/donald-trump-proposes-550-billion-in-new-government-debt/
4 Oxford Economics (2016). Trump vs Clinton: Polarization and Uncertainty.