The coming infrastructure boom

As governments speed up infrastructure budget in the middle of the pandemic, opportunities for investment are plentiful.

Jul 28, 2021


Most of us take our public services for granted - from clean tap water, high-functioning electricity and Internet connections, to roads and also bridges. These amenities - economists call them infrastructure - are essential for the economic and social development of the world.

Yet, the Covid-19 pandemic has thrown a spotlight on just how lacking the world remains in our infrastructure development. One estimate by the Global Infrastructure Hub (a G-20 forum initiative) anticipates a cumulative investment gap of US$ 15 trillion by 2040 across telecoms, transport, energy as well as water industries.

This is partially because of the historical tendency of governments and businesses to under-invest in infrastructure as it normally entails huge upfront funding, with payoff taking years, if not decades.

One fallout of the pandemic is that major governments have had to bring forward their long-term spending plans. We believe this is likely to benefit economic growth over the coming years in two ways: First, by directly boosting demand for goods, services and workers as a result of more construction activities; second, and more importantly, by boosting the economy's long-term growth potential, since better infrastructure lifts productivity throughout an economy. Good-quality roads, railways and Internet connections make it easier, cheaper and faster to transport goods, services and information, supporting economic progress.

In the coming years, we see three broad areas of focus across major government spending programmes:

Traditional infrastructure: To build and upgrade roads, railways and other transport networks; real estate; and water infrastructure

Clean energy: To accelerate the adoption of renewable energy, including upgrading electricity grids to enable them to tap more efficient and cleaner energy sources; electrifying transport networks; supporting sustainable farming and circular economy initiatives.

Digital investments: To invest in high-speed 5G networks, cloud computing, data centres and develop advanced applications that help productivity - for example, artificial intelligence and autonomous driving.

Bedrock of recovery

How can investors benefit from the coming infrastructure boost?

We expect traditional infrastructure spending to form the bedrock of a post-pandemic recovery. Building and construction-related activities are likely to pick up on the back of large-scale government investment, driving demand for metals, energy, equipment and other raw materials.

This should benefit the more cyclical equity sectors, such industrials, materials and energy. Financial sector equities should also benefit as greater financing demand and modestly rising interest rates lift bank revenues and profit margins.

The shift towards clean energy, underpinned by a growing interest in environmental issues among stakeholders and support from regulators, offers another opportunity for investors. More than 110 countries, including China and the US, have committed to decarbonising their economies by 2060.

The power and transport sectors, which collectively account for over 50 per cent of carbon emissions today, will have important roles to play in this transition. Renewable energy and its related supply chain, including technologies which can help industries to decarbonise and become more energy efficient, are likely to be key beneficiaries. US President Joe Biden's proposal to increase and extend tax credits to renewable energy production is likely to accelerate this trend.

The buildup of the renewable energy infrastructure tends to be metal-intensive. This is likely to boost demand for metals, including copper, steel, aluminium, and rare metals, driving commodity prices higher.

Bright prospects

Electric vehicles (EVs) are another potential growth area for investors. More than 20 countries have proposed to ban the sale of vehicles powered by internal combustion engines by 2030-40.

The prospects are bright: total penetration of electric and hybrid vehicles in the overall automotive market is expected to grow by more than five times by 2030, from less than 10 per cent in 2020. EV supply chains and related charging infrastructure are also likely to benefit from this trend.

Last, but not the least, investments to upgrade digital infrastructure and install new digital assets will continue to underpin demand for advanced semiconductor chips, sensors and cloud infrastructure as governments try to sustain their technological dominance and keep their industrial sectors competitive.

In conclusion, Covid-19 has made the world's infrastructure deficit glaring. We see the global response, including the ensuing boom in infrastructure investment, as a ray of hope for multiple stakeholders.

Investors have a critical role to play in financing this infrastructure gap - the opportunities are vast and exciting.