Moneywatchers: Investing in infrastructure

Moneywatchers: Investing in infrastructure

source US Chamber of Commerce Foundation

By Nicholas Bertell, For the Times-Standard

POSTED: 01/14/17,

While Donald Trump and Hillary Clinton didn’t agree on a whole lot, spending on infrastructure is one area they saw eye-to-eye. They both know that America’s infrastructure is crumbling. Water pipes on the East Coast are 100 years old, bridges are falling and roads are dilapidated, but no one has come up with much of a plan to improve things.

Nov. 8 saw the election of a new president and as investors, we would be negligent if we didn’t pay attention to what a Trump economy will look like. And according to him, the first place to look is at that crumbling infrastructure. While campaigning, Trump constantly emphasized spending $1 trillion on US infrastructure projects over the next ten years. Admittedly, $1 trillion dollars isn’t easy to come by and the Republicans are against spending that kind of money, but the fact he will couple it with tax cuts should be enough to get it through congress, but it’s not a done deal yet. Remember though, increasing spending while cutting taxes is not a guaranteed path to success.

What is infrastructure? We all know instinctively, but the term comes from the Latin word “infra,” meaning below. So, an infrastructure is the underlying framework of a system, or country. Roads, utilities, energy, transportation, pipelines, airports and airplanes, trains and tracks, seaports and ships are all included. The things we take for granted but we can’t live without.

Trump is right about the state of our infrastructure, in fact The American Society of Engineers graded it D+. Further, the World Economic Forum ranked the US 11th worldwide which isn’t very good for the richest nation on earth. Over 142,000 bridges, or one in four, were classified “deficient” in 2015 by the Department of Transportation. The biggest reason is that we’ve stopped spending the necessary amounts to keep up to par. Back in the 1960s federal, state and local spent 4.5 percent of our total economic output on infrastructure and that percentage is 1.5 percent today.

Another reason for our infrastructure disrepair is that we pay for transportation, or roads, with an 18.4 cent per gallon fuel tax that hasn’t been increased since 1993. Automobiles are much more fuel efficient now so the additional cars and additional miles they drive hasn’t translated into greater tax dollars. If the future of driving is going to be lithium powered battery vehicles, some other means of financing infrastructure spending has to be found.

And this isn’t going to get any cheaper. Mckinsey and Company, a leading consulting group projects $57 trillion will have to be spent worldwide on infrastructure between now and 2030 just to keep up with economic growth. The US portion is going to increase from $3 trillion annually today to $9 trillion by 2025.

The S&P 500 is divided up into ten sectors, but infrastructure investment fall into just four of them: Utilities, Industrials, Energy and Communications. While investing in individual stocks can be very lucrative, if you’re just starting out in infrastructure investing, you might consider Exchange Traded Funds(ETFs) or Mutual Funds. Generally, ETFs have lower expenses that leave more for you down the line. There are numerous reasons to invest in infrastructure besides Mr. Trumps proposals, the sector is less volatile than most and yields are both generous and steady.

AMP Capital, a global investment company, breaks infrastructure investing into four categories. The first and safest is Social Infrastructure including hospitals and schools and these produce consistent long term income. The second is the Regulated Utility segment of which PG&E is one. They provide basic services like sewage, water supply, electricity and other types of energy plus investors get protection from government regulation since it’s the regulators that set prices companies can charge.

The third category is transport infrastructure including airports, seaports, rails and roads. These segments depend on public usage so investors take on risks that require a premium and thus expect a higher rate of return. The forth segment is communications consisting of telecommunications and towers. These companies are subject to fierce competition and more rapid deterioration than most other infrastructure companies, so the additional risk requires additional return.

Infrastructure will be on the forefront of the news cycle for years, so it’s a good time to look for investments that will reward you while taking less risk.

Until the next time, we’ll watch your money.

Nicholas Bertell is a financial advisor. Opinions expressed are those of Redwood Coast Financial Partners, and are not endorsed by Summit Brokerage Services, Inc. or its affiliates. All information herein has been prepared solely for information purposes, and is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy. Certain Statements contained within are forward looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.