on 14-10-2016 09:36 AM
We get asked a lot what the impact of the US election will have on infrastructure spending. In short both candidates are falling over themselves to commit more to infrastructure spending.
Here's a piece that Jonathan Reyes, one of the Portfolio Managers on the AMP Capital Global Infrastructure Securities Fund (Also trades as GLIN AU on the ASX), put together.
US listed infra – Jonathan Reyes (likely trading conditions for energy pipeline assets in the US)
Infrastructure is a hot topic in the current presidential race. As with most policy related plans, the Democratic nominee has articulated much more detail and has called for $275 billion in infrastructure spending over five years. This would include the creation of a national infrastructure bank, which would be given $25 billion to support loans and loan guarantees for infrastructure projects. In total the plan would support about $500 billion in spending on infrastructure. The Republican nominee, Trump, has said he would like to spend at least twice as much. “We’ll get a fund, make a phenomenal deal with low interest rates and rebuild our infrastructure.” he said. The majority of this spending, however, will be done by the government to improve highways, airports and seaports. This investment in infrastructure should lead to improved overall economic activity, but offers limited private capital participation opportunities for our investors.
The key opportunity for Global Listed Infrastructure in the election will be in the Energy Infrastructure sector and oil and gas pipelines specifically.
Trump: Being a climate change sceptic, Donald Trump promised the energy industry that he would cut taxes and reduce regulation on fossil fuel energy production and infrastructure. This would unleash what he called "a treasure trove" of coal, oil and natural gas in the United States. "You will like me so much," he told an audience of roughly 1,000 natural gas executives and workers at the Shale Insight 2016 conference in Pittsburgh on Sept. 22. "You are going to like Donald Trump."
Despite not having articulated a plan on how he plans to do so (other than cutting taxes and reducing regulation), the deemphasized focus on renewable energy and increased focus on fossil fuels will be a positive for the industry. Increased fossil fuel production will result in an increased demand for the infrastructure which transports the commodities (rail for coal and pipelines for natural gas, oil and refined products). Also, the political landscape will likely be more constructive to help these projects get built. Mr. Trump has vowed to green-light the contested Keystone XL pipeline if elected saying "I would absolutely approve it, 100 per cent, but I would want a better deal,".
Clinton: The Democratic party is viewed as having a more negative stance on Energy (and Energy Infrastructure) than the Republican party with a higher focus on combating climate change and increased regulation. However, under the Obama administration the industry and the political party coexisted fairly peacefully. In fact, US oil production increased over 80% under the Obama administration to near-record levels and natural gas is up by nearly one-quarter. Instead of shutting down the hydraulic fracturing process that has unlocked natural gas from dense rock formations, Obama has promoted the fuel as a stepping stone to a greener, renewable future. The current administration has also permitted drilling in the Arctic Ocean over the objections of environmentalists and opened the door to a new generation of oil and gas drilling in Atlantic waters hugging the East Coast. He also signed a measure to lift a 40-year-old ban on the export of most U.S. crude – all of which has combined to be a large tail-wind for the Energy Infrastructure and Pipeline sector.
To date, neither of the two candidates have outlined plans that would be detrimental to the overall pipeline sector. Therefore, the short term risk to our portfolio are fairly limited. Under a Clinton White House, we would expect the status quo from a policy perspective (as her views are largely in-line with the Obama administration) whereas free market factors will continue to drive overall US hydrocarbon production. For example, global supply and demand and therefore, the price of the commodities will be the largest factor in production levels in the US. With a Trump victory, we could experience a short term “sugar high” as the industry sentiment will likely increase and the pipeline stocks could experience higher share prices in anticipation of higher future production. However, we believe that the same market factors will drive production, not policy in the long term.
Neither candidate presents significant downside risk to the industry specifically. In a Clinton victory, we expect the status quo to continue which has been a positive and in a Trump victory the Energy industry and pipelines specifically is likely to be one of the few winners. We continue to watch developments closely and examine and evaluate any new statements from the two candidates. However at this stage, we feel very comfortable that the portfolio will not be negatively impacted long-term should either candidate win.