The outlook for inflation is one that should stay elevated for the next 10 years due to ESG cost integration and a tight oil and natural gas supply. Infrastructure should consequently benefit from the demand for real assets and a significant push towards infrastructure particularly digitalization as the economy quickly adapts to a new emerging world.
US infrastructure is a political crowd pleaser
President Joe Biden signed into law an 1.2 trillion dollar bill to spend on infrastructure in the next five years. 550 billion are to be allocated to transportation, broadband and utilities. This is not a drop in the bucket in an economy of roughly 23 trillion, but only a beginning. US infrastructure is very old even absent of the climate challenge, while many states have under-invested for decades. The rapid emergence of climate change needs and the political appeal of these investments are such that both Republicans and Democrats are likely to expand such projects in the future.
Digital transformation
While infrastructure is broadly supported by this new bill, what matters the most in the race to compete with China is the digital transformation of the United States. Republicans and Democrats are likely to agree in the coming years on a very substantial increase in this sector to catch-up and overtake China. A digital transformation allows companies to become more agile, innovative and robust and support an increase in potential growth as productivity improves. The externalities for example of online education as universities become ever more digital are hard to under-emphasize, while rural areas remain heavily under-invested in the digital world. In mature to soon obsolescent companies, it is a way to deliver the growth expected by investors.
Persistent elevated inflation
While some listed infrastructure companies are built to beat inflation (e.g. highway gate tolls automatically rise with inflation), they also depend on the business cycle and its trend. The future ahead of us both in the US and globally is of decent growth and elevated inflation. Companies demonstrating pricing power as well as companies benefiting from infrastructure plans will drive demand for real assets as a hedge. Furthermore, central banks will try to stay accommodative pushing real rates further down to reduce the real debt burdens of their governments.
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