Britain still needs rebuilding

Before the referendum result, infrastructure stocks were starting to recover nicely. Why have they taken a tumble on the country’s vote for Brexit?

As I noted in Strategic Intelligence recently, I’m in good company for once.

Here’s our headline from Friday 24 June 2016:

It’s Brexit – but don’t panic!

Compare this with Business Insider’s headline of Wednesday 29 June 2016:

Obama on the Brexit vote: Don’t panic

Whilst I wouldn’t exactly claim this as a huge endorsement, it’s still quite reassuring to see the world’s most powerful man siding with SI.

But while it’s one thing not to freak out at the short-term Brexit shock, it’s another to keep calm on a longer-run view if things aren’t going your way for the moment.

On this topic, today I want to look at the prospects for UK infrastructure spending following the referendum result.

Since the latter, the FTSE 100 index has not only rallied, it has topped the 6,500 level again to reach its highest level since August 2015.

These are still early days in the new Brexit world – the range of political possibilities remains very wide – but that’s still an amazing performance.

OK, some areas of the stock market such as banks, house builders and travel companies have crashed on fears that they’ll be losers if we do leave the EU (though even that’s no certainty). But they’re not my subject for today.

That’s because another sector that’s also taken a hit is UK infrastructure. And I’ve been writing a fair bit about this recently.

Before the referendum result, infrastructure stocks were just starting to recover nicely. So why have they taken a tumble on the country’s majority vote for Brexit?

How the Brexit vote hit infrastructure stocks

First, UK June construction output in June fell at its fastest pace since the great financial crisis in 2009, according to a survey by Markit and the Chartered Institute of Procurement and Supply (CIPS). Slower demand has caused a drop in purchasing activity for the first time in just over three years.

Second, as a result of this, concerns have developed that Britain won’t be able to boost investment spending as had been previously hoped. Or indeed, as has been planned.

Third, there has even been talk that the UK construction industry will slam into a “brick wall” early next year due to the “massive uncertainty” created by the Brexit vote, according to ‘an industry source’ quoted by the Independent.

Apparently, “anxious international investors have already pushed the pause button on future UK infrastructure investments”.

Sounds like someone’s panicking!

Move away from the immediate political fog and the UK hasn’t suddenly undergone a massive change over the last fortnight. The country has an overall population of 65 million people, almost all of whom are consumers of goods and services.

We generate annual output worth £1.8 trillion. That’s a vast amount of money in anyone’s language. No sensible global businessman is going to ignore it.

Indeed, Germany’s top employers have just warned about ‘punishing’ the UK for voting out. Not a smart move, they say.

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Further, examine the small print of those purchasing activity numbers and you’ll see that the weakest performing sector was house building.

Commercial building work also suffered a sharp loss of momentum as new projects weren’t started to replace those that were approaching completion.

Those, though, aren’t our concern. We’re interested in infrastructure. And look, civil engineering was the only sector not to record a fall in output.

Sure, some national spending plans will be delayed. For example the government is to defer a decision on airport expansion until the new Conservative Party leader is elected, according to the BBC.

But it’s still my bet that the government will continue to find the cash for most of the major infrastructure projects that it has planned.

Chancellor George Osborne has already abandoned his target to restore UK state coffers to a surplus by 2020. Given the effects of the referendum vote, he says that the government had to be “realistic about achieving a surplus by the end of the decade”.

Meanwhile, all the problem areas that I’ve previously highlighted, such as looming energy shortfalls and crumbling roads, aren’t going to improve by themselves.

They will just get worse and will still require even more money to be spent on them. That’ll be the only way to stop the lights going out!

Brexit boosts the case for spending

Put another way, if Britain does actually leave the EU – by no means a certainty – something will be needed to restore our national morale.

An infrastructure drive would be the perfect way to kick-start the country’s economy. To repeat my mantra: Britain still needs rebuilding.

“A new UK government, expected to be in place by September/October, could well provide significant fiscal stimulus by quickly approving major infrastructure projects…as a way of supporting the economy”, says Luca Paolini, chief strategist at Pictet Asset Management.

UK transport secretary Patrick McLoughlin agrees.

In a post-poll speech, he said that although “there are things we don’t yet know the answer to, things still to work through”, infrastructure investment had become more important, not less: “as we make decisions about our future in the coming weeks and months, it is vital that the UK is seen to be open for business and building the infrastructure it needs to compete.”

Being realistic, nearer-term profit forecasts for infrastructure stocks are likely to be reduced.

But the sector sell-off could be providing an even better chance of buying into a cheap area with great long-term investment potential.

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