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Why infrastructure spending is a ‘big deal’ for investors and the economy

A surge of government funding will likely mean much more than better roads and bridges. It could create a wide range of potential investment opportunities.

September 10, 2021

“CALLS TO INCREASE INFRASTRUCTURE SPENDING are as old as America’s crumbling bridges,” says Joseph Quinlan, managing director and head of CIO Market Strategy in the Chief Investment Office (CIO), Merrill and Bank of America Private Bank. The $1 trillion Infrastructure Investment and Jobs Act1 “isn’t just a big deal,” he adds. “It also comes not a moment too soon.”

“Infrastructure is the backbone of the U.S. economy and a critical part of America’s ability to produce, consume and compete.”

Joseph Quinlan, managing director and head of CIO Market Strategy in the Chief Investment Office, Merrill and Bank of America Private Bank

This renewed emphasis on infrastructure is occurring during the early stages of what is likely to be a broad, extended expansion of the U.S. economy, according to a recent Capital Market Outlook report from the CIO. Those two forces — massive public investment in infrastructure combined with a “private-sector-fueled, stronger-for-longer economic expansion” — should create strong opportunities for investors, Quinlan says.

How infrastructure supports the economy

“Infrastructure is the backbone of the U.S. economy and a critical part of America’s ability to produce, consume and compete,” Quinlan says. “But public infrastructure spending has been on the decline for years, and there’s now a $2.6 trillion gap between what’s been allocated through 2029 and what the needs are.” In a recent study, the American Society of Civil Engineers gave U.S. infrastructure a “C-minus” rating. Among the findings: 42% of bridges are 50 years or older, with 7.5% now structurally deficient; a water main breaks somewhere in the United States every two minutes, and Americans spend an extra $143 billion per year just on car repairs owing to deteriorating roads.2

Meanwhile, the pandemic, as well as rising concerns over climate change and social and racial inequalities, have highlighted the need for nontraditional infrastructure in areas ranging from environmental remediation to wider access to high speed internet, Quinlan adds. Geopolitical tensions have only heightened the imperative to invest in these areas now. “With China now viewed as a strategic competitor rather than a strategic partner, the U.S.-China Cold War pivots around advanced capabilities in 5G, smart grids and a connected/tech-driven infrastructure,” Quinlan says. “The latter will largely determine who sets the pace in winning the race for technological supremacy in the 21st century.”

Where will the money be spent?

The $1 trillion in proposed spending includes $110 billion for roads, bridges and other major projects, $66 billion for passenger and freight rail, $25 billion for airports and $46 billion to make the infrastructure system more resilient to threats such as natural disasters.

42% of bridges are 50 years or older, and a water main breaks somewhere in the United States every two minutes.2

Spending on new and emerging infrastructure, meanwhile, includes $65 billion for broadband, $8 billion each for electric vehicle infrastructure and electric buses and transit, and $21 billion for environmental remediation. With industries globally mobilizing in response to climate change and other threats, the current bill may represent only the start of an extended “supercycle” of infrastructure spending by businesses as well as government, Quinlan says. “Both the public and private sectors have become stewards of the environment, portending more spending on smart cities, green grids and increased outlays to help de-carbonize the planet.”

What are potential opportunities for investors?

With infrastructure likely to remain a priority for years to come, investors should take a long-term view of potential opportunities across a wide range of sectors and industries, Quinlan says. Upgrades to bridges, highways, waterways, ports and other traditional infrastructure create potential long-term opportunities in stocks of industrial companies. “And when it comes to climate change and the environment, investors may want to gain more exposure to leaders in renewable energies such as solar, wind, electrical vehicles and biomass,” he adds.

Each of these renewable energy sectors requires its own infrastructure, Quinlan notes. The growth of electric vehicles, for example, creates opportunities in electricity distribution, charging stations and batteries, while rising reliance on solar and wind power will require investment in high-voltage direct current (HVDC) technologies, which transfer wind and solar power from where it is created to where it is needed. Commodities such as copper, cobalt, lithium and rare earth minerals may be attractive as well.

To help mitigate risks, consider spreading such investments across a broad range of traditional and emerging infrastructure, Quinlan suggests. And, as always, before making portfolio changes, speak with your advisor about whether infrastructure investing makes sense in the context of your overall financial situation, timeline, risk tolerance and goals.

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