Reconstructing the post-pandemic world

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With developing markets such as the US committing to major new fiscal stimulus and pledging renewed commitment to infrastructure building what does this mean for markets and investors? At  a recent London conference portfolio managers from BNY Mellon Investment Management considered the likely road ahead.

With US President Joe Biden recently signing a US$1.9 trillion American Covid-19 rescue plan into law and offering a pre-election pledge to deliver new investment of US$400bn over 10 years in clean energy and innovation¹ what might all this mean for infrastructure development in the US and beyond? In turn, what legacy might the Covid-19 pandemic leave for global infrastructure developers?

For Mellon² senior portfolio manager Jim Lydotes the last 12 months have seen some major infrastructure plans put on hold. But, he said, the pandemic has also driven an acceleration in areas such as the development of renewable energy and the building out of better, more robust telecommunications networks.

As a way of getting people back in jobs and putting energy into the economy, governments are looking to accelerate this push to renewable energy build out. Looking forward, we could actually see 10 years of renewables growth accelerated over five years,” he added.

The benefits of better telecommunications networks have also never been more in focus than over the last 12 months. The work-from-home necessity has been the catalyst and has highlighted the tremendous need for new communications infrastructure investment.”

Suzanne Hutchins, investment manager and team leader of the Newton Real Return team pointed out how the sheer scale of global government support throughout the pandemic – buoyed by reaction to the Covid-19 pandemic – has helped stimulate a synchronised global recovery. While she highlighted there has been massive spending pledges into areas such as building out new schools, airports and transport links, she also pointed to growing attention in sustainable infrastructure areas such as renewable energy. This, she noted, was creating some attractive new prospects for investors.

The trend towards addressing climate change and investing more sustainably means a lot of investment is being put towards renewable energy, electric vehicles and battery manufacturers. There are opportunities evolving in the semiconductor space as well and there will be broader beneficiaries of the trend beyond those of building construction, bricks and mortar operations,” she added.

Considering this activity, Hutchins believes copper – an essential electronic component which is becoming increasingly scarce – has the potential to become “the new oil” of this investment climate.

Preparing for climate change

Mellon head of municipal bonds, Dan Rabasco pointed out innovations such as telemedicine and distance learning for schools had underlined the need for improved communications infrastructure in the US at both an urban and local level. Another important area he identified for infrastructure investment was transportation and the need for sound, reliable mass transit and improved road systems. 

Like many investors, Rabasco has also become increasingly concerned by the toll extreme weather events in the US – such as the recent severe winter storms in Texas – are taking on municipalities. However, he says many states and cities are building out major action plans to increase their resilience and will ultimately call on investors to help support their efforts via municipal bond issuance.

Rabasco believes the municipal bond sector will play a key role in US infrastructure renewal as that sector has historically financed the majority of the nation’s infrastructure.

Municipal government debt markets will gain greatly from federal government spending on infrastructure. From a fundamental perspective infrastructure leads to economic activity and economic growth.

That means revenues go up for municipalities, their tax bases expand, and they could experience increased usage of fee based users of essential services like water and power. As such spending on infrastructure could have a multiplier effect on the US economy and be a source of returns and diversification for many investors in municipal bonds,” he said.

Post-pandemic life?

While Rabasco, Hutchins and Lydotes have all seen evidence of de-urbanisation resulting from the pandemic, not all are convinced this will be a sustained trend. Lydotes said he believed a pre-Covid trend of senior citizens moving back into urban environments in their retirement could revive once the pandemic is more fully under control.

According to Hutchins, increased awareness of our environment and efforts to find more sustainable ways of developing our infrastructure will lead to the development of and growing demand for more dedicated investment products such as green and sustainable bonds.

She concluded by pointing to the potential diversification benefits of infrastructure and renewables related investments in a market where inflation fears are on the rise.

Rising inflationary pressures mean it may be beneficial for investors to hold real assets such as renewables that can offer some degree of inflation proofing and diversification from other, more traditional assets. In an environment where we are seeing a pickup in inflation expectations that may be no bad thing,” she said.

¹ Joebiden.com. Nine key elements of Joe Biden’s plan for a clean energy revolution. November 2020.
² The fixed income, liquidity, equity and multi-asset capabilities of Mellon Investments Corporation (Mellon), including its managers and analysts, are transitioning to Insight Investment, Dreyfus Cash Investment Strategies and Newton Investment Management respectively. The transition is expected to be completed in Q3 2021.  There will be no change to the firms’ investment processes, approach or philosophies during the transition period nor are there any plans at this time to merge or rationalise any of the BNY Mellon Investment Management-branded funds managed by these entities. For more information please visit www.bnymellonim.com

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