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The big bundle of cash the federal budget dropped on the infrastructure sector — $12 billion — has many investors wondering whether a juicy opportunity awaits. If you consider that the U.S. House of Representatives has passed its own massive stimulus bill, which includes US$43 billion for highways, bridges, transit and airports, the idea of investing in infrastructure-related stocks seems a concrete bet. But be warned, dear retail investor: infrastructure may prove a rocky road to wealth.
According to a recent CIBC report, U.S. infrastructure stocks have rallied 50% since mid-November, which means they have likely already overshot their fundamental value. But here in Canada, where the advance has been a “fraction” of that in the U.S., the sector may still be a buy.
So where might the action be? Matt O’Brien, head of infrastructure business at Toronto-based Connor, Clark & Lunn Financial Group, says the money in the latest budget is going to traditional civil and social infrastructure like roads and hospitals, rather than to oil and gas infrastructure. And so, if there are gains to be had, this is where they will register.
In the construction sector, one of the first names mentioned is global giant SNC-Lavalin Group Inc. (TSX: SNC). But O’Brien issues a note of caution. “I’m not sure the Canadian budget will move the needle on SNC considering the amount of business they do outside the country,” he says.
Names that could benefit from the budget are smaller, more Canada-focused “pure play” construction securities such as Aecon Group Inc. (TSX: ARE), the Bird Construction Income Fund (TSX: BDT.UN) or Churchill Corp. (TSX: CUQ). Although PCL Construction Inc., Graham Group Ltd. and EllisDon Corp. are some of the best-known construction firms in the country, they are privately held and thus inaccessible to investors.
On the engineering front, Stantec Inc. (TSX: STN) should get some business, as should some less-well-known names such as Genivar Income Fund (TSX: GNV.UN). CO2 Solution Inc. (TSXV: CST) might benefit from a $1-billion fund in the budget dedicated to developing carbon capture technology.
Overall, however, money managers seem to be tempering their optimism. Keep in mind that the extra $12 billion the government has dumped on infrastructure is actually dwarfed by the $200 billion to $250 billion that is spent annually in the sector privately. (In an August report, the Institute for Research on Public Policy said that Canada needs an estimated $200-billion investment in public infrastructure at a time when commitments from federal and provincial governments only total around $65 billion.) And as the credit crunch makes it harder to put together financing for projects, the government stimulus might actually be swallowed in a larger slowdown in the sector. “The bigger driver in this sector will be the credit market six months out and whether or not those markets normalize,” says O’Brien.That suggests we could see less spending overall as we move through this slowdown. And that would make chasing construction company equity returns a fool’s game.
The smarter way to invest in infrastructure would be to do it like the big pension funds do, through a direct investment in the actual projects. Over the past decade, institutions have devoted a larger portion of their funds to so-called direct infrastructure investments, which provide bond-like safety and produce a slow and steady 8% return (the result of, say, collecting tolls on a toll road).
Retail investors have been largely unable to invest like that. Currently, Macquarie Power & Infrastructure Income Fund (TSX: MPT.UN) is one of the few funds that give retail investors access to infrastructure products. But experts say we’re likely to see more such products in the year ahead. And that suggests the best way to play the infrastructure trend might be to exercise a little patience.
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