Don’t be fooled.
Infrastructure may be a long and rather boring word. But in fact the outlook for infrastructure spending is very exciting.
And, following the UK’s EU referendum result, the story is getting even stronger.
Years of neglect have left key parts of Britain’s infrastructure – roads, railways and in particular power plants – in a parlous state.
So even pre-Brexit we’d already identified the urgent need for Britain to spend much more money on making these vital parts of our economy fit for purpose.
And with the government christening the new National Infrastructure Delivery Plan earlier this year, committing spending of more than £100bn over the next five years while encouraging significant private sector investment too, the way forward was starting to look very encouraging.
But then a big fly in the ointment appeared. Britain unexpectedly voted to leave the EU.
With all the leading ‘Leave’ campaigners fading from view, no one knew what that really meant for the economy’s future. Were all the pre-referendum dire warnings issued by the Remain camp about potential recession and more austerity about to materialise?
Suddenly, it seemed, the infrastructure bet was off
In the days immediately following the Brexit vote, the UK construction sector was one of the hardest-hit areas of the stock market.
Fears circled that major British building projects would be delayed or cancelled altogether. Economic gloom-mongers – many of whom were determined that their pre-poll predictions of panic would play out – were having a field day.
Every bit of negative news, in particular the UK government deferring a decision on construction of the Hinckley Point nuclear power station, was cited as a reason to question whether Britain really would continue with its rebuilding programme.
Yet the problem for the naysayers is that they’re not looking at the facts. The economy isn’t falling off a cliff as they’d warned.
The UK infrastructure case: why it’s looking even better after Brexit
I believe that there are now even stronger reasons why Britain will embark upon an infrastructure boom:
1) George Osborne has been replaced – and with him has gone austerity. But consumer and business confidence has been knocked by the referendum result. The new Tory government has realised that a post-Brexit Britain needs rebuilding as both the economy and our national morale need a fillip.
2) New Chancellor Philip Hammond has a much more pro-infra view than his predecessor. Hammond has already said that extra cash could be ploughed into infrastructure projects in a sharp change of course from the Osborne era.
3) His boss agrees. In a speech two days before she became prime minister, Theresa May called for a “proper industrial strategy” and suggested that the UK Treasury should issue project bonds to finance infrastructure.
4) No sooner said… UK QE has just been restarted by the Bank of England. This is the first stage in the process of rebuilding Britain as it adds liquidity to the system and provides a big potential buyer of new bonds.
5) Pundits are on the same hymn sheet too. Here’s Allianz economist Mohamed El-Erian in a recent FT piece entitled ‘BoE bond-buying need not end badly for markets’: “Britain must complement the Bank of England’s post-Brexit vote stimulus with a concerted government attempt to foster growth.”
6) Interest rates and government bond yields are at rock-bottom levels. There could hardly be a better time to borrow to finance an infrastructure boom.
This is only half a reason:
7) The much-discussed Hinckley Point issue is all about politics not economics. On security grounds, does Britain really want to cede control over part of its power production to China? Australia doesn’t, why should we?
8) The pound’s fall has made investing in the UK a lot cheaper than before the referendum result. Overseas players will want a slice of the action – Britain is still a very attractive market for global businesses. Japanese giant Softbank has shown the way with a $32bn takeover of UK high-tech firm ARM. UK infrastructure investment is set to benefit in the same way.
9) Government-inspired infra spending makes long-term economic sense. It can provide a good return on investment in boosting GDP growth by more than the cost of the extra outlay. So it’s financially as well as politically justified.
10) Ultimately there’s no real choice on the matter: Britain has to rebuild key parts of our national fabric to stay competitive. If it doesn’t, the lights WILL go out one day! The post-Brexit world is the right time to do this.
11) Talking about return on investment, both institutional and private investors are struggling right now to find anything attractive to purchase. The good news is that the construction sector offers some out-of-favour cheap shares with a strong reason for buying. There are some high yields on offer as well.
But don’t delay.
You don’t want to miss this opportunity!
If central banks go into helicopter money mode, infra stocks will be a great way to play it.
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