US infrastructure spending may lead to compelling investment opportunities

US infrastructure spending may lead to compelling investment opportunities

There can be no doubt that there is a great need for
increased US infrastructure spending: the American Society of Civil Engineers rated
US infrastructure as a D+,1 a Federal Highway Administration Survey estimated
roughly 20% of roads are in poor condition,2 and over half of
schools need repair, renovation, or modernization according to the Department
of Education.3 It is one of the few issues that has strong bipartisan
support in Congress.

While it would be great to pass a federal bill that boosts
the repair and modernization of our roads, public transit, schools, water
networks, and airports, it certainly isn’t a prerequisite for investors to potentially
capture the massive infrastructure opportunities that companies now face. State
and local governments are investing more in infrastructure as they actually own
the vast majority of the country’s non-defense public buildings and structures.4
Plus, investments in non-traditional infrastructure that respond to emerging
demands like 5G,
cloud computing, and Internet of Things (IoT) are growing rapidly. 

Opportunity No. 1: State
and local government spending

Not only do state governments own the majority of the
country’s public infrastructure, they also pay roughly three-quarters of the
cost of maintaining and improving it (Figure 1). These governments are
well-positioned to improve their public buildings and structures, and they have
continued to take on new projects with infrastructure contractors. Healthy municipal
balance sheets support increased infrastructure spending as outstanding debt
for state and local governments has fallen below the post-Great Recession peak,
whereas debt for the federal government, households, and businesses has continued
to reach record highs.5

Today’s low interest rate environment also supports investment affordability through cost-effective municipal debt issuance. Simultaneously, state and local governments’ revenues currently exceed their pre-recession levels, further solidifying their ability to repay debt.

Figure 1: State dollars and borrowing pay for most infrastructure projects

Source: National Association of State Budget Officers 2019 State Expenditure Report. This capital spending data includes the costs of new construction, purchases of buildings and major equipment, and major repairs and improvements.

Infrastructure projects can be supported by means other than
municipal debt as well:

  • States often turn to user fees and tolls to
    support projects such as highways, bridges, and water and sewage facilities.
  • While
    the federal gas tax used to fund road and highway improvements hasn’t been
    increased in a quarter of a century, dozens of states have passed legislation
    to raise their gas taxes to pay for infrastructure projects just since 2013.6
  • Another
    source of funding is through public-private partnerships, where governments
    reduce their operating budgets by turning operations and maintenance
    responsibilities over to private companies. For example, partnerships can be
    arranged where private companies pay the state government a one-time fee for a
    long-term agreement to operate a portion of its public roadways in exchange for
    revenue generated from the tolls.

Opportunity No. 2: Deployment
of modernized infrastructure

Today, “infrastructure” doesn’t only refer to traditional
projects such as roads, water networks, and schools. To meet the modern demands
of the information era, companies are rapidly deploying modernized
infrastructure in areas ranging from 5G
cellular network technology
and data centers to IoT and smart
cities
.

For example, 5G can offer significant speed upgrades over
4G, latency reduction, and denser network coverage. As modernized
communications infrastructure is established, new possibilities that require
heavy amounts of information arise, such as real-time data collection and predictive
analytics through IoT-enabled sensors connected to wind turbines, autonomous
vehicles, or even construction equipment. There is also a growing interest in
municipalities for smart grids that include energy measures like smart meters
and renewable energy resources, and for smart cities that use IoT-enabled
sensors to more efficiently manage resources.

Many businesses and governments are seeking insight from all
sides of their organizations with the help of IoT and artificial intelligence,
which requires improved computing power and modernized IT infrastructure. Infrastructure-as-a-service
is a nascent cloud-computing solution that can provide on-demand computing
power more efficiently and securely than on-site legacy IT infrastructure. The cloud computing infrastructure-as-a-service
market is expected to rapidly grow by 30% annualized by 2023 to over $140B (Figure
2).

Figure 2: Infrastructure-as-a-service market forecast

Sources: IDC, Bloomberg Intelligence. As of June 2019. E = estimated. Past performance does not guarantee future results. There can be no guarantee that estimated forecasts will come to pass.

How can investors capitalize
on these opportunities?

There isn’t an official definition for the infrastructure
industry, but traditional views tend to focus on companies in the industrials, materials,
energy, real estate, and utilities sectors. This traditional portfolio
structure often ignores emerging areas of infrastructure focus and the massive
investment taking place within the information technology sector.

In response to this gap, Invesco Unit Trusts launched the American Infrastructure Growth Portfolio to
target both traditional infrastructure-focused stocks that may benefit from
increased state and local government infrastructure spending as well as
non-traditional technology-focused stocks that participate in the deployment of
modernized infrastructure.

Takeaways

Despite today’s divisive political landscape, both sides of
the aisle agree our country’s infrastructure is in major need of repair. While
it would be nice to see agreement on a federal bill that addresses the
specifics of an infrastructure spending plan, state and local governments aren’t
waiting for the federal government’s lead. Instead, they are utilizing their healthy
fiscal condition to take on new projects that respond to our aging
infrastructure. At the same time, we’re seeing businesses and municipalities
also invest heavily in modernized infrastructure like 5G and cloud computing.
As such, companies that help with the repair, maintenance, and modernization of
US infrastructure appear to have plenty of work to keep them busy for the
foreseeable future.

1 Source: American Society of Civil
Engineers, 2017 Infrastructure Report Card, April 2017. Most recent data
available.

2 Source: US Department of Transportation, Office of Highway
Policy Information, Highway Statistics 2017, August 2018. Most recent data available.

3 Source: US Department of Education: Condition of America’s
Public School Facilities: 2012-13, March 2014. Most recent
data available.

4 Source: CBPP calculations of Bureau of Economic Analysis
data on Fixed Assets, 2015. Most recent data available.

5 Source: Bloomberg News, “Everyone Is Running Up Debt
Except America’s States and Cities,” Sept. 20, 2019

6 Source: US Bureau of Economic Affairs, gross domestic product,
November 2018

Important information

Blog header image: Ma YiChao / Stocksy

The Internet of Things describes the concept of connecting
any device with an on/off switch to the Internet and to each other.

Investment in infrastructure-related companies may be
subject to high interest costs in connection with capital construction
programs, costs associated with environmental and other regulations, the
effects of economic slowdown and surplus capacity, the effects of energy
conservation policies, governmental regulation and other factors.

Many products and services offered in technology-related
industries are subject to rapid obsolescence, which may lower the value of the
issuers.

There is no assurance that a unit investment trust will
achieve its investment objective. An investment in this unit trust is subject
to market risk, which is the possibility that the market values of securities
owned by the trust will decline and that the value of trust units may therefore
be less than what you paid for them. This trust is unmanaged and its portfolio
is not intended to change during the trust’s life except in limited
circumstances. Accordingly, you can lose money investing in this trust. The
trust should be considered as part of a long-term investment strategy and you
should consider your ability to pursue it by investing in successive trusts, if
available. You will realize tax consequences associated with investing from one
series to the next.

The opinions referenced above are those of the author as of Nov. 22, 2019. These comments should
not be construed as recommendations, but as an illustration of broader themes.
Forward-looking statements are not guarantees of future results. They involve
risks, uncertainties and assumptions; there can be no assurance that actual
results will not differ materially from expectations.

Kamran

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