US infrastructure spending may lead to compelling investment opportunities

Upgrading aging structures and building new, modernized infrastructure may provide companies with long runways for growth

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.

David Davenport is a Unit Trust Equity Analyst and is responsible for research and security selection for equity unit trusts. Mr. Davenport has been with Invesco since 2018 and in the industry since 2014. Prior to joining Invesco, he served as a research analyst at Capital Strategies Investment Group.

Mr. Davenport earned a BBA degree in finance investment and banking from the University of Wisconsin – Madison. He holds the Series 7 and 63 registrations and is a Chartered Financial Analyst® (CFA) charterholder.

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