Building on success: Why infrastructure investment matters

Negative interest rates and quantitative easing (QE) have been part of unconventional monetary policies introduced by central banks in their efforts to kick-start their economies. These measures, however, are wearing off. Plus their impact has been mixed and the negative effects – such as hitting savings - are being felt by more and more people.

A new solution is needed and it could be one tied to infrastructure.

Unconventional policies , effective in liquidity emergencies such as the financial crisis in 2008, are less effective in correcting structurally led demand insufficiencies. On the other hand there is old-fashioned Keynesian fiscal policy, which, while more direct and effective in stimulating demand, has already been exhausted in many countries, leaving governments wallowing in debt.

One answer could be a combination of quantitative easing with fiscal expansion. And it is already gaining traction and popularity.

In particular, we see a growing trend towards combining monetary policy with fiscal expansion and private sector incentives to boost infrastructure investments. This option would stimulate growth, create jobs and raise productivity.

Sam Hodgson | Bloomberg | Getty Images

Construction workers pour concrete as part of a bridge expansion project in California.

Earlier in September the Organization for Economic Co-operation and Development warned that monetary policy is overstrained .

"Monetary policy is becoming over-burdened. Countries must implement fiscal and structural policy actions to reduce the over-reliance on central banks and ensure opportunity and prosperity for future generations," said the OECD.

It also called for "a stronger collective response using fiscal, structural and trade policies to boost growth."

"On the fiscal front, low interest rates offer governments additional fiscal space for investing in human capital and physical infrastructure to promote short-term demand, long-term output and inclusiveness," the OECD added.

Such infrastructure projects could span from traditional projects to ease transport - roads, bridges, railways, ports and airports - to health and education.

UK Finance Minister Philip Hammond, also hinted that he would use the Autumn Statement, a key UK fiscal policy statement set for the end of November, to "reset fiscal policy" if necessary in the wake of the Brexit vote.

Why are infrastructure investments needed now?

• Infrastructure investments are by far the most powerful asset class in terms of economic relevance, and therefore of interest to governments. Not only has infrastructure been heavily under-spent since the financial crisis, it also has among the highest economic multipliers as a productivity-boosting and job-creation machine and importantly alleviates the scarcity of long-term yielding assets.
• Recent austerity measures have opened up a considerable infrastructure gap, with estimates on what's needed just to maintain and support existing infrastructure over the next 10 years varying from between $350 billion and $800 billion a year.
• Low interest rates and very low yields - in other words costs of funding – further underline the ideal circumstances for countries to invest in their infrastructure. Current financial terms right now are more attractive than ever for funding long-term projects and programs .
• Provided some important conditions are met, a combination of both quantitative easing and fiscal expansion could not only prove highly effective but also have several positive side effects for capital markets and for investors. – This can be done either directly in a money-funded fiscal easing program (often referred to as "fiscal QE" or "helicopter money") – or indirectly (via a separate but coordinated economic policy).,. In particular, "Infrastructure QE" is one of the most effective measures monetary and fiscal authorities can take these days to prepare their countries for the coming decades and pull them out of their structural slump.

How can investors get in early on this emerging trend?

According to their size and risk tolerance, investors can take advantage in multiple ways.

• Large and institutional investors can opt for equity participation in infrastructure funding projects. Canadian pension funds, for example, are among the most advanced and experienced in this area, owning airports and other transport facilities in Europe.
• Infrastructure funds and other special infrastructure investment vehicles. Solutions like Credit Suisse's Global Infrastructure Partners team (GIP), for example, manage approximately $33 billion for its investors. Additionally, the companies in GIP's portfolio have combined annual revenues greater than $5 billion and employ approximately 21,000 people.
• Specific listed stocks or sectors affected directly or indirectly by infrastructure spending programs. These can include: construction, and sectors exposed to construction, such as capital goods or even the mining and metals sector. This allows private investors who want access to listed stocks to benefit from rising earnings trends. In the narrow definition of infrastructure investments, there are four categories: transport, telecoms, energy, water supply and treatment. A broader look would include social infrastructure: education and health facilities.
• There are fixed income opportunities as well: Bonds issued by infrastructure banks and institutions are a very low-risk way of riding this trend. One example is bonds issued by infrastructure development banks for example like the EIB, KfW and others.
• Infrastructure development agencies and state-guaranteed infrastructure bonds are other low-risk investment examples.

This trend is not temporary or short-term. This is one of the few true solutions to the multitude of our contemporary problems and will therefore likely be the start of a broader multi-year investment trend.

Infrastructure investment constitutes an interesting long-term solution that will only gain in appeal in this current soft global economy and as politicians and central bankers seek new methods to boost their economies and private investors look for assets that solve the yield challenge.

Nannette Hechler-Fayd'herbe is Head of Investment Strategy, CS International Wealth Management

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