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Infrastructure offers opportunities to diversify portfolios and increase returns

Over the next decade, trillions of dollars will be invested in repairing roads and bridges, upgrading water and sewage systems, upgrading the power grid, and expanding airport and rail systems.

Investors are already queuing to buy debt or take stakes in projects as Congress debates the passage of a $ 1.2 trillion bill, a down payment on the $ 2 trillion McKinsey & Company says McKinsey & Company is saying the U.S. will need to spend to update their aging infrastructure.

Governments around the world are grappling with how to pay for infrastructure projects. According to McKinsey, it would take $ 4 trillion annually to keep the global economy pace with economic growth.

The high capital requirements to finance these projects are likely to change the financial markets in the coming decade.

SHOOKtalks recently assembled a panel of experts to discuss how financial advisors can invest in infrastructure projects and reap the benefits of their clients.

Jac McLean

New York Life Investment

The panel was attended by Brandon Dees, Executive Director, Morgan Stanley Wealth Management; Daniel Foley, Senior Vice President and Associate Portfolio Manager, CBRE Clarion Securities; and Robert Burke, managing director of MacKay Municipal Managers.

“This is going to be massive,” said Jac McLean, senior managing director at New York Life Investment Management, who moderated the meeting. “Investors need to benefit from this multi-year vector.”

The ability of local, state, and national governments to fund these projects depends on Wall Street’s appetite for national debt.

Dan Foley

CBRE clarion

“We anticipate that $ 1 trillion to $ 3 trillion in taxable municipal debt may be spent to cover many of it [U.S.] Infrastructure projects, ”said MacKay’s Burke. “The biggest interest we’ve had in this area has come from customers who are concerned about credit deterioration in the investment-grade corporate market.”

State and local governments usually finance infrastructure improvements by issuing debts and paying them back with project income, user fees, or taxes.

Municipal bonds were once tax deductible. But legislative changes passed in 1986 limited the tax deductibility of municipal bonds. Other changes since then have resulted in public projects being funded through the issuance of taxable debt.

Taxable municipal debt used to make up 2-3% of the total market. But tax debt now accounts for 25-30% of average annual emissions. “This has really created a lot of taxable investment opportunities,” said Burke.

The rise in taxable debt has led businesses to buy municipal debt. Since the interest is taxable, the issuer is forced to offer a higher interest rate.

Infrastructure assets like cell towers, data centers, airports, toll roads and pipelines offer investors a very defensive risk profile that protects against inflation, CBRE’s Foley said.

Brandon Dees

Morgan Stanley

“It’s the kind of asset that goes well with long-term debt. Unsurprisingly, we are seeing a steady upward trend in infrastructure allocations as an asset class, ”said Foley.

Green energy is particularly attractive given the political interest in spending money on projects related to climate change. In addition, many states have regulations promoting renewable energy that are driving growth in this market. It is expected that government requirements will significantly boost demand for renewable energies in the future.

McLean asked the panelists how financial advisors could best help clients invest in infrastructure. There are several ways to achieve this, the panelists said.

“Some investors are withdrawing funds from an existing global equity allocation and viewing the infrastructure as a low-volatility, longer-term game,” said Foley.

Other investors have converted a fixed income allocation and dedicated infrastructure-related investments. In this case, Foley said, the investment is considered stable, but with better growth prospects than fixed income investments.

“We’ve seen investors get there everywhere,” added Foley. “The point is that the real asset allocation is growing and the infrastructure carries part of it.”

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