Market News

Infrastructure Investors Due an Income Boost from Chancellor

September 13, 2016

Looking for an alternative source of investment income? You could do a lot worse than infrastructure, as economists believe the sector is due an injection of cash from the Government.

New infrastructure projects could be an effective option to stimulate the economy following Britain’s exit from the European Union. Chancellor Philip Hammond will present his first Autumn Statement on November 23, and is expected to set out plans to stimulate the economy through public spending and tax cuts.

“Typically the economy gets a greater boost from direct spending by the Government than from tax cuts,” Hetal Mehta, senior European economist at Legal & General explained. “Additional investment could include infrastructure projects, research and development programmes, and increased housing construction. This could be better for the UK from a longer-term perspective, although the impact might be slow to come through into real activity.”

Nick Gartside, co-manager of the JP Morgan Global Bond Opportunities fund agreed, saying investors should look out for an increase on infrastructure spending in the coming Autumn Statement.

The UK economy looks to have rebounded from the immediate shock after the Brexit vote. However, the longer-term future of the economy is still uncertain. Bank of England Governor Mark Carney introduced stimulus package in August to cushion the impact of the vote on the economy, yet the effectiveness of the monetary policy has been called into question.

Paul Brain, head of fixed income at Newton said while the UK is reluctant to push rates into negative territory, impacts on pension funds from the very low gilt yields are enough to suggest an alternative plan is needed, and it looks like the UK “may be better positioned to benefit from a dose of government funded infrastructure spending”.

Other stimulus options available are consumer tax cuts, which could give a short term boost to the consumer, a corporation tax cut or stamp duty holiday tax cuts, Mehta added.

Infrastructure Trust Reports Boost in Profits

Closed-end fund John Laing Infrastructure (JLIF) reported a half-year profit rise and a 3.41p dividend on Monday.

Profits before tax of the John Laing Infrastructure trust, increased to £72.3 million in the first six months of the year from £14.5 million over the same period in 2015, thanks to its international expansion and project divestments.

Despite a slowdown in market activity after the Brexit vote, there remains an oversupply of capital seeking investment in UK infrastructure and limited supply of projects, Paul Lester, chairman at John Laing Infrastructure said.

It is also reported that Andrew Charlesworth, a director of the trust said the Brexit vote was an opportunity for the Government to “embrace spending and infrastructure development”, promoting growth in the sector. The trust is currently trading at a 16.9% premium to net asset value.

How to Invest in Infrastructure

For investors who are looking for opportunities within infrastructure, there are two types of funds that can offer exposure. They are direct funds that invest in infrastructure projects or equity based funds that invest in infrastructure related companies.

For investors looking to again direct access – and greater diversification in their portfolio – David Holder, fund analyst at Morningstar suggests closed-end funds.

“Investment trusts are a better way to gain exposure in infrastructure investment due to liquidity restrictions within the sector,” said Holder.

“The underlying infrastructure projects are often long term in nature. As closed-end funds do not need to meet investor redemptions, they can invest for long term without being required to facilitate liquidity. It can gear to finance acquisitions which can be lumpy in this space. Closed-end funds can also retain excess income on the revenue account to smooth income distributions over the long term.”

From January to July 2016, investors bought £187 million shares in open-end infrastructure equity funds, according to data from Morningstar Direct. July saw the largest inflows of the year with £75 million.

Source: MorningstarKaren Kwok | 13/09/2016

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