How to Play the Coming Infrastructure Boom

Before COVID-19 struck, the world was facing a critical infrastructure investment deficit. Planned spending on new construction and maintenance of existing infrastructure fell far short of needs, particularly in emerging markets and some large developed economies.

The pandemic has changed that. The largest global economies responded to the crisis with a fiscal push that’s increasingly targeting areas that lacked investment over recent decades and new sectors better geared for a post-pandemic world, such as clean energy and digital infrastructure.

The U.S. recently passed the $1.2 trillion Infrastructure Investment and Jobs Act^[1]—a long-term plan to invest in traditional heavy infrastructure, digital networks, and clean energy with the ultimate goal of creating millions of new jobs, building a more resilient and sustainable economy, and eliminating carbon emissions from the power grid by 2035.

“China and Europe are not far behind,” said Steve Brice, Chief Investment Strategist at Standard Chartered Wealth. “Governments worldwide have shifted their priorities and brought forward long-term spending plans in an effort to boost and sustain the post-pandemic recovery.

The EU’s European Green Deal is a EUR1 trillion infrastructure spending plan with a strong tilt towards sustainable solutions.^[2] China, meanwhile, is turning to market forces and private investment to push through its five-year $1.4 trillion “digital, smart and innovative” infrastructure plan.^[3]

Combined, infrastructure spending in the U.S., China and Europe over the next decade is forecast to be $4.9 trillion to $6 trillion.

For investors with well-positioned allocations, these structural tailwinds represent a substantial long-term opportunity.

Most countries’ investment plans are centred on three broad areas: traditional infrastructure (transport networks, water supplies), clean energy (renewable power, electric-vehicle charging stations, circular economy initiatives), and digital transformation (expanded broadband access, 5G networks, data centres).

Traditional Infrastructure

Infrastructure projects are expected to form the bedrock of plans to help drive the post-Covid recovery. In 2020, more than 2,500 global infrastructure projects were announced — an increase of 5.5% from 2019.^[4]

A significant percentage of these projects are directed towards water infrastructure. As climate change threatens supplies amid increasing demand from urbanisation and industry, there’s a pressing need to protect drinking water supplies and improve wastewater and storm water systems.

The U.S. has pledged $55 billion^[5] in water infrastructure spending, while investment in water conservancy hit a record high of CNY770 billion ($118.5 billion) in 2020, according to China’s Ministry of Water Resources. Globally, there are about $330 billions in existing water-related projects.^[6]

Potential Beneficiaries: The more cyclical value-style equities in the Energy, Industrials and Materials sectors should benefit from this surge in investment. Given the metal-intensive nature of infrastructure and renewables, this trend should also be positive for metal producers and industrial commodity prices. The financial sector should also benefit from these infrastructure spending plans due to greater demand for loans and modestly higher interest rates.

“We also believe industries tied to the development, transformation and integration
of clean water resources and distribution could stand to benefit,” said Steve Brice. “Utilities firms are well-placed, particularly those with existing knowledge, infrastructure and expertise in the use of clean energy sources.”

Clean Energy

With more than 100 countries so far committing to zero-emission targets, investment in renewable energy and clean transport is set to soar.^[7]

International Renewable Energy Agency (IRENA) estimates that the target proportion of total final energy consumption for renewables to meet the Paris Agreement targets needs to reach to 60-70% globally.^[8]

“The world is still short of that target but the sharp decline in renewable energy costs in recent years has helped increase their share in the energy mix,” said Steve Brice. “To achieve a pathway to energy transition, renewable energy would need to account for two-thirds of our energy supply.”

Because transport accounts for around one-fifth of global carbon dioxide emissions,^[9] the focus on electrified mobility has accelerated worldwide. Investments in electric vehicles (EV) and charging infrastructure and high-speed rail are surging, and governments are also incentivising EV adoption through subsidies and tax credits.

More than 20 countries have proposed bans on the sale of internal combustion engine vehicles from at least 2040,^[10] which will result in a substantial increase in the EV sales in the coming decades. China, Europe, and the U.S. are currently the top markets for EV sales, with sales in Europe and China already surpassing 1 million each in by 1H21.^[11]

[1] Bloomberg [2] European Commission [3] Bloomberg [4] Standard Chartered [5] U.S. Government [6] Standard Chartered [7] Climate Action Tracker [8] IRENA [9] Our World in Data [10] Coltura [11] Canalys

This article was co-created by Standard Chartered and Bloomberg Media Studios.