Investors see British infrastructure getting stimulus boost after Brexit
By Alasdair Pal LONDON (Reuters) - UK infrastructure funds are hitting record highs on the prospect of more government spending after Britain's vote to leave the European Union, bolstered by the view that the effectiveness of ultra-loose monetary policy is reaching its limits. The Brexit vote looks likely to lead to a short-term downturn in building activity: the latest PMI data shows sentiment in the construction industry at a seven-year low, while some infrastructure projects have been held up on increased uncertainty. But that weakness looks likely to increase the chances of a government-backed shot in the arm for the industry, with new Prime Minister Theresa May open to the idea of using infrastructure to stimulate a flagging economy. Fund managers are playing the trend in two ways: through infrastructure funds that invest in toll roads, hospitals and schools; and by buying companies that could benefit from any government-backed boost in building. Investor interest was piqued by a speech given by May shortly before becoming PM, in which she promised Treasury-backed bonds for new infrastructure projects – a departure from six years of spending cuts under David Cameron's government. May has made infrastructure spending a cornerstone of her industrial strategy, aimed at kickstarting an economy weakened by Brexit, a move under consideration across developed economies on fears over the effectiveness of ultra-loose monetary policy. With Bank of England governor Mark Carney ruling out negative rates, and UK Chancellor Philip Hammond saying he will take "any necessary steps" to support the economy, investors are positioning for the use of infrastructure as a policy tool. Gavin Haynes, managing director of wealth manager Whitechurch Securities, has doubled clients’ exposure to global infrastructure funds post-referendum, at the expense of commercial property and European equities. "We see it as a global trend – it is not just about Brexit," he said. "Traditional monetary policy seems to be running out of steam to stimulate the economy." BRICK MAKERS TO BUILDERS Infrastructure trusts, including those run by III < 3IN.L> and John Laing , have hit record highs post-referendum, extending gains after the BoE cut interest rates on Aug. 4. Their performance contrasts with that of property investment trusts, which that have slumped on fears of price declines as businesses abandon London as a European base. “There is a lot of demand for government-backed income streams,” said Colette Ord, an analyst covering property and infrastructure trusts at Numis. “They are seen as being higher-quality.” That safety comes at a price, however: the average infrastructure trust investing in government-backed assets is trading at a 20 percent premium to net assets, an all-time high. Investors concerned with trust valuations are instead looking to stocks that may benefit from a pick-up in construction – from brick-makers to builders’ merchants. Tony Yarrow, a fund manager at Wise Investments, has been adding to his holdings in the sector, that include construction company Kier and brick-maker Ibstock . “If I were May or Phillip Hammond I would be saying ‘the environment has changed: we can borrow as much money as we want almost for nothing'," he said. “There is a massive need for infrastructure in the UK.” Part of the attraction for Yarrow of a company like Kier is that a large chunk of its revenues come from more stable sources, including motorway maintenance and refuse collection. Analysts at Barclays estimate the UK requires 215 billion pounds of investment to replace ageing utilities infrastructure and wean the economy off carbon-based fuel. “Construction companies are priced as though they are in an economy that is going into recession, but if there is any sort of stimulus valuations look pretty attractive,” Yarrow added. Costain is the most exposed to the theme, with 90 percent of its revenues coming from UK construction, according to JP Morgan, followed by WS Atkins , Interserve and Kier. Balfour Beatty and Carillion could also see a boost, the bank’s analysts said. Stephen Bailey, a fund manager at Liontrust, and whose fund is among Kier's largest shareholders, has also been adding to holdings that he believes have been unfairly penalised. "Central banks have got to be quite inventive: most tricks have been tried," he said. "I’m not a believer that cutting rates will stimulate growth, but construction could be a way of providing that kind of stimulus." (Editing by Vikram Subhedar and Toby Chopra)
