Pros and Cons of Infrastructure Investing

PROS AND CONS OF
INFRASTRUCTURE INVESTING
By www.ProfitableInvestingTips.com

http://profitableinvestingtips.com/profitable-investing-tips/pros-and-cons-of-infrastructure-investing
With the Democrats in control of the
House of Representatives for the
next two years a consensus may be
reached to fund upgrades in the sorry
state of US infrastructure.

This issue needs to be addressed but
has repeatedly been pushed back
due to political fights over attempts to
repeal the Affordable Care Act or
fund a big wall between the USA and
Mexico.

Assuming that funding goes through
to repairs roads and bridges, water
treatment and the power grid, or rail
links and airports, what are the pros
and cons of infrastructure investing.

And, where would the best places be
to invest?

Here are three different opinions on
the subject.

Infrastructure Stocks

Market Watch has specific
suggestions for infrastructure
stocks.

The American Society of Civil
Engineers gave America’s overall
infrastructure a D+ in its last annual
infrastructure report card.

That’s a nationwide grade, and
includes a D+ for wastewater
infrastructure and a D+ for energy
infrastructure among other
categories; rails were graded a B, the
only grade above C+ across 16
categories, and zero A grades were
awarded.

Assuming that funding goes through,
here are five concrete investment
suggestions.

Aecom: Construction and
engineering focusing on design,
financing, and related services,
specializing in infrastructure projects

Caterpillar: This company is the
world’s largest maker of construction
equipment.

It designs, manufactures, and sells
its equipment through a global
network and provides customers with
financing and insurance to support
sales.

This stock is a bellwether of the
American and global economy and a
sure bet to prosper in an era of
increased infrastructure spending.

Nucor: This steel maker is likely to
benefit from any funding to rebuild
bridges, rail links, or any project
requiring steel.

Martin Marietta Materials: This
company produces and sells
construction aggregates (sand,
gravel and crushed rock) and other
building materials.

All of these materials are essential
for rebuilding or repairing roadways
as well as bridges.

U.S. Infrastructure ETF: This
infrastructure-related ETF is focused
on the USA and about half of it is
focused on electric utilities.

There are many other possibilities
and each and every one needs to be
considered on its own merits
depending on where funding is
directed.

Is This Truly the Time to
Invest in Infrastructure?

Now that you have a few suggestions
for investing in infrastructure you
need to look at intrinsic stock
value.

Will 2019 be the year of renewed
infrastructure spending?

And, will that truly result in profits for
various companies and higher stock
prices?

JPMorgan questions if this is
the infrastructure moment.

Institutional investors have been
allocating a growing share of their
portfolios to infrastructure assets-
including regulated utilities,
transportation and contracted power.

The focus has been on core
investment strategies, which can
produce stable, forecastable cash
flows through the use of prudent
leverage and some combination of
transparent and consistent regulatory
environments, long-term contracts
with credible counterparties, and
mature demand profiles.

Most core infrastructure assets have
monopolistic positions in the markets
they serve, so prices and usage are
relatively insensitive to periods of
economic weakness.

Instead, core infrastructure
investments are driven by a different-
and uncorrelated-set of factors,
including political and regulatory risk,
development risk, operational risk
and leverage.

Also, each core infrastructure sector
has unique risk factors, so core
strategies include investments from
multiple sectors to reduce volatility
within the asset class.

They note three factors that make
infrastructure investments attractive,
diversification, protection from
inflation, and stable and high yields.

Of the pros and cons of infrastructure
investing, these are the positives.

Another positive for many of these
investments is that they are easy to
understand with basic and
straightforward business models.

The Dark Side of
Infrastructure Investing

The Brookings Institute writes
that infrastructure investing
requires careful evaluation.

They provide a graph showing the
dismal decline in US infrastructure
spending.

US Infrastructure Spending 1985 to 2015

There is no question that the USA
needs to upgrade its infrastructure
pretty much across the board.

The fly in the ointment is what
projects get funded and will they be
“roads to nowhere” in the districts of
powerful representatives and
senators or “best bang for the buck”
projects that provide the most benefit
for the common good and the best
rest return on investment for
individual investors.

This is the negative side of the pros
and cons of infrastructure investing.

While the discussion of the
administration’s infrastructure plan
has revolved around a $1.5 trillion
spending goal, only $200 billion
would be in the form of federal
spending.

In addition, there are other places in
the budget where spending on
transportation is cut, making the net
new federal investment possibly
much smaller.

Moreover, it is not clear that the
leverage sought for the $100 billion
of matching funds could realistically
be achieved.

State and local governments would
have a strong incentive in their grant
applications to create “new” revenues
that would qualify for matching
grants, and that would be offset by
revenue reduction elsewhere in their
budgets.

Much of this discussion is
reminiscent of the early Obama
administration during which funding
projects were envisioned only to be
drowned in red tape and political
infighting on the federal, state, and
local levels.

A valid concern is that we end up
with lots of “pork barrel” projects
benefitting the districts and states of
the powerful in Washington and of
little value the public or to interested
investors.

Another concern with the
administration’s matching funds
proposal is the minimal consideration
it gives to cost-benefit analysis of
new investments.

Only 5 percent of federal evaluation
criteria are allocated to “evidence
supporting how the project would
spur economic and social returns on
investment.”

Instead, the administration’s
selection criteria focus on whether
states generate new revenue
sources for infrastructure, meaning
that projects may be selected based
on funding options in the states, not
the overall national benefits.

By giving preference to revenue
sources-including private capital-over
social benefits, the proposal may
reallocate infrastructure spending
away from socially important projects
that are true public goods and are not
attractive to private investors.

All told, 2019 may be the year that
infrastructure spending comes to the
fore.

The chore for investors will be to do
diligent fundamental analysis of
specific investment opportunities
based on their realistic chances of
profit as spending works its way into
real projects in the infrastructure
sector.

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