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These are alarming days for investors, and most now need an antidote to the chaos caused by the most widely publicized mini-Budget announcements. Focusing on the other measures can be one way to reduce anxiety and reconfigure your portfolio.
As part of his plan to boost growth — about which we should hear more at the Conservative Party conference next week — Chancellor Kwasi Kwarteng pledges to streamline planning for roads and other categories of infrastructure, such as different types of energy projects, including hydrogen, nuclear, onshore wind, energy efficiency and energy security.
Building and upgrading such systems should support recovery in the UK and worldwide. Labor also sees increased infrastructure investment as fundamental to economic success: The Organization for Economic Co-operation and Development estimates that £5 trillion will be needed worldwide annually until 2030.
Driving force: if you decide to put cash into infrastructure – about 5 percent of your portfolio is the suggested portion
There is a new urgency as the war in Ukraine rages on. “What the world needs now is energy efficiency,” said Riley of the Guinness Global Energy Fund.
The sabotage of gas pipelines between Europe and Russia this week will increase calls for greater energy security.
Stephen Daniels of the ARC Time UK Infrastructure Income fund, which has stakes in the major infrastructure trusts, notes: “Energy efficiency is at the top of the to-do list for many countries.”
If you decide to put money into infrastructure – about 5 percent of your portfolio is the suggested portion – there’s an extra: the inspiring nature of the technologies.
For example, a former tip may not be a suitable plot for new construction. But the methane produced from the rotted waste is a greenhouse gas and can be used to generate electricity.
Daniels points out that private investors used to be barred from being able to support such technologies, as well as projects that require huge capital, such as roads and railways.
Infrastructure has traditionally been viewed as an industry uncorrelated with equity markets, an important consideration for investors reassessing their options.
There is also the option of an insured income. The contracts under which many public sector projects are carried out provide long-term inflation-related revenues, although the mini-budget has had a detrimental effect on this.
Infrastructure investment trusts use a discount rate formula to assess the value of future cash flows. But the fall in government bond prices, which has made higher interest rates more likely, threatens to raise discount rates.
A higher discount rate makes any income stream less attractive. The typical discount rate is 6-7 percent, and a 1 percent increase would typically decrease NAV by about 6 percent.
These concerns have hit the share prices of trusts. Shares in the HICL Infrastructure trust, which has interests in the A63 autoroute in France and Affinity Water in the UK, are down 14 percent in the past week.
Discount rates will be scrutinized as well as planning policies and how they are implemented, as James Dawes, chief financial officer of the 3i Infrastructure trust, explains.
He says: ‘The mini-budget measure to abolish corporate tax hikes will benefit businesses. But the devil is in the details of the structure of the planning reforms.”
Kwarteng may have pledged to ‘speed up’ many UK schemes, but such promises have not always been fulfilled.
There are also the problems of rising construction and material costs – and the likelihood of interest rates raising faster than previously thought.
Dawes notes, “Most of our businesses have long-term fixed-income financing. But the peak in financing costs does pose a risk to the financing of new projects.’
The trust, which has delivered a return of 76 percent over the past three years – twice the industry average – is currently targeting the UK and Europe.
It owns Infinis, a British group that produces power from landfills, and ESVAGT, the Danish group whose vessels support the offshore wind and oil and gas industries. Thanks to its track record, 3i Infrastructure’s share price stood at a premium of more than 20 percent to its net asset value earlier this year.
This has now been reduced to a 3 percent discount in line with the industry trend, in the wake of the mini-budget, making the trusts a viable proposition for investors like me who don’t like to overpay.
For example, the premium on the BBGI Global Infrastructure trust fell to 3 pc. despite inflation-protected revenues from public-private partnerships in health and transport. when you cross the Golden Ears Bridge in Vancouver, Canada, you are on a BBGI Infrastructure asset.
Navigating the coming weeks will be challenging, and focusing on the long term is even harder than usual.
One thing is almost certain: the world population is increasing and will require more infrastructure in every form: roads, railways, healthcare facilities and electricity.
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