“We need to build roads, bridges, airports, locks, dams, and rail that work for this century — not the last one. And let’s not forget about updating our energy grid, repairing and replacing our water infrastructure and sewers, and making sure all Americans have access to broadband.” — Amy Klobuchar
“We can only create good jobs if we make smarter investments in infrastructure and do more to support small businesses, not stiff them.” — Michael Bloomberg
The condition of roads, bridges, schools, water treatment plants, and other physical assets greatly influences an economy’s ability to function and grow. For an economy to realise its full potential it requires well-maintained roads, railroads, airports, and ports to facilitate commerce.
Infrastructure in the United States, unfortunately, is crumbling — unsurprising when non-defense gross government investment (federal, state, and local) has largely been in decline since the 1960’s, falling from above 4 per cent of GDP to about 2.3 per cent in 2017.
In its most recent report card on the condition of America’s infrastructure, the American Society of Civil Engineers (ASCE) gave U.S. infrastructure a D+ or “poor” rating. The ASCE argues that the US can no longer afford to delay investing in its critical infrastructure systems. Henry Petroski in his book The Road Taken: The History and Future of America’s Infrastructure explains that the delays caused by traffic congestion alone cost the economy over US dollar 120 billion per year.
According to the ASCE’s estimates, the cost of bringing America’s infrastructure to a state of good repair (a grade of B) by 2025 is US dollars 4.6 trillion, of which only little more than half has been committed. Improving roads and bridges alone requires more than US dollars one trillion more than the amount allocated.
Infrastructure investment has received renewed interest in Washington following the mid-term elections last year, we have seen President Trump, Senators and some Members of Congress all discussing the benefits of upgrading the US’s infrastructure in the recent past.
Amy Klobuchar, the Senator from Minnesota, one of the Democrats from the crowded field of Democrats angling to take on President Donald Trump in 2020, has proposed a US dollars 1 trillion infrastructure investment package. President Trump in his 2020 budget request to Congress has renewed call for a US dollars 1 trillion infrastructure plan.
The consistency of the message on infrastructure spending from both the Democrats and Republicans is unsurprising.
There is a general consensus amongst economists and analysts that spending on infrastructure has a fiscal multiplier effect much larger than the typical government spending multiplier. A study conducted by economists at the Federal Reserve Bank of San Francisco in 2012 on the impact of unexpected infrastructure grants on state GDPs (GSPs) since 1990 found that, on average, each dollar of infrastructure spending increases the GSP by at least two dollars. While a University of Maryland study conducted in 2014 found that infrastructure investments added as much as US dollars 3 to GDP growth for every dollar spent.
Investment Perspective
The unmet infrastructure investment needs of the US and the growing political consensus around upgrading the nation’s infrastructure, we think, will be a tailwind for companies that can cater to the demand created by such spending.
The most obvious way to play the US infrastructure investment theme is through the Global X US Infrastructure Development ETF $PAVE.
While we think a generalised exposure through an ETF may work well over a prolonged period. There a number of direct plays that we think may be superior in the nearer term — once there is more clarity or momentum in pushing through infrastructure spending programs in Washington.
On the telecommunications and technology upgrade front we think Clearfield Inc. and A10 Networks Inc. are potential long ideas.
The next generation of cell phone and wireless service will need large scale investments in “small cell” wireless nodes, which are expected to replace traditional cell towers. Moreover, more than 19 million people living in rural America do not have access to broadband and investment needs to go into eliminating this so called “broadband gap”.
Clearfield Inc. $CLFD manufactures telecommunication equipment. The company designs accessories, cassettes, connectors, assemblies, panels, and other related products for various applications.
A10 Networks Inc. $ATEN provides computer networking products and security solutions. The Company offers controller, firewall, hardware appliances, protection systems, and other networking products.
On the construction and construction materials side we Vulcan Materials Co., Construction Partners Inc. and Quanta Services Inc.
Vulcan Materials Co.$VMC produces construction aggregates. The Company’s principal product lines are aggregates, asphalt mix and concrete, and cement.
Quanta Services, Inc. $PWR provides specialized contracting services to electric utilities, telecommunication, cable television operators, and governmental entities. The Company also installs transportation control and lighting systems and provides specialty electric power and communication services for industrial and commercial customers.
Construction Partners, Inc. $ROAD provides infrastructure construction services. The Company offers services to public and private infrastructure projects includes highways, roads, bridges, airports, and commercial and residential sites. Construction Partners serves customers in the United States.
This post should not be considered as investment advice or a recommendation to purchase any particular security, strategy or investment product. References to specific securities and issuers are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.