Time For A Rebuild?

Three days in hospital can focus the mind. Apart from some personal rebuild opportunities to look forward to, my post-op thoughts were mainly out-of-body. Sadly, not out of hospital. It was truly shocking to see many wonderful healthcare workers work within infrastructure so badly fit for purpose, and yet I’m optimistic. Maybe not yet for our health service, or “Angola”, as the ministerial department brief was once nicknamed. But further afield. We could go to “the world’s most exciting economic zone” which the Brexit Tory government now thinks is Northern Ireland but only because of its unfettered trading access to both the EU and UK markets. Imagine that! Don’t take too long imagining, the No.10 communications team are furiously back-pedalling that Brexit awks. No, I was thinking first of America, and I’m not the only one. Warren Buffett published his annual shareholder newsletter last week and declared that in his 80-year investing career “I have yet to see a time to make a long-term bet against America”. I’d place one US bet anyway.

America is going to build again. Investors for the last 10 years have gorged on asset-light businesses in tech, SaaS and finance while shunning asset-heavy industries and sectors which require significant capital expenditure(capex). Something has changed. Yes, the Trump regime during its Washington crime spree talked about “infrastructure week” nearly every week. However, as Rupert Murdoch has just stunningly admitted, not only was it just talk it was also a Fox-fraud on the nation. But, not now. There is a real possibility we have entered what Wall Street would describe as a “capex supercycle”. The spending stars have aligned in three ways:

  1. The infrastructure of the US is extremely old, about as old as it has been since before WW2.
  2. A good article in the Variant Perception blog cites a Global Infrastructure Hub estimate that the ANNUAL infrastructure spending gap has reached $800 billion. That equates to the annual US defence budget which is experiencing an existential implosion of its biggest military rival in Ukraine.
  3. Prequin, the hedge fund research group, say infrastructure fund raising in 2022 was very strong despite overall market turmoil. In fact, fund raisings for infrastructure accounted for over 20% of all private market funding compared to an 8% long-run average.

The data above suggests a good environment for infrastructure spend but it needs a catalyst. Or, a President. The Biden administration with its IRA and Chips legislation have dangled tax incentives in front of corporates and investors. And the headlines keep coming….

  • How Arizona Is Positioning Itself For $52 Billion To The Chips IndustryNew York Times
  • Ford Announces $3.5 Billion Investment in Michigan ElectricReuters
  • Red States Leading the US in Solar and Wind ProductionGuardian

This mix of re-shoring semiconductor manufacturing, ramping-up electric battery production and investment in green energy( in unlikely places!!) is just the thin end of the wedge. Dare I say, a post-Covid world is more receptive to bigger, more managerial government, even in the US of A. Indeed, there’s a whiff of a Rooseveltian “New Deal” in the air and as the pensions and savers of the world seek yield-producing assets there is further good news. Government incentives, like Biden’s IRA tax credits, create competition for capital and investment. So, is it any surprise to see the following Bloomberg headline….??

  • Europe Banks On Its €72 Billion To Counter Biden’s Green Payouts

We have written previously on the massive $9 trillion annual spend required to move the global economy away from fossil fuels but this is not just a government agenda. Corporates are moving fast. German gas giant, Linde, has just announced a whopping $7-9 billion spend on clean energy projects including converting 11 of its 13 plants to hydrogen energy. However, hydrogen is not just a northern European gig. Check out Spanish gas player, Cepsa, and ACE Terminals creating a hydrogen/ammonia supply line to Rotterdam. No tomatoes, Nigel. Sorry.

Back in the real world, of course, this investment must make sense. That means assets and securities exposed to these structural trends should generate better than average returns for investors. If that becomes the case, and asset-heavy industrial stocks outperform, then other sectors could suffer. Interestingly, “Big Short” investor Steve Eisman was on CNBC in recent days warning about “the days of tech stocks beating the market are over”. Of course, lots of people are wary of tech after a difficult 2022 but possibly more intriguing, was to hear Eisman talk about his focus shifting to “green energy and infrastructure”. It might be time to rebuild your investment and pension portfolios too?



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