By Anton Pil
President-elect Trump’s plan to have up to $1trn of new infrastructure investment over the next decade to repair crumbling roads, bridges and highways in the US has been a significant driver for the stock market’s recent rally, as investors perceive it could give a jolt to the economy and jobs.
As evidenced by the average age of the capital stock, government spending has been insufficient and major opportunities exist across the infrastructure sector. Much remains to be seen about how President-elect Trump’s plans would materialise, but given his apparent reliance on private investment as a source of funding, investors with the scale and expertise to access opportunity in these initial stages will be critical.
We’re likely to see some combination of infrastructure debt and public private-partnerships taking shape, but the US is significantly less advanced in asset privatization than many developed market peers, making the outlook uncertain. We suspect the new administration will seek to take action on fairly visible initiatives such as utility distribution and transportation. Progressing from what has historically been a municipal driven market, we may see significant evolution depending on how much of the agenda is enacted.
Real estate will be another important focal point, not least because of President-elect Trump’s familiarity with the asset class and with the use of leverage. Importantly real estate can provide a reliable source of inflation protection, which will be attractive in a period of rising rates.
It’s worth noting that both lease rates and occupancy rates remain high because construction and construction lending has been fairly muted in the last few years. As long as interest rates increase as a function of economic growth, real estate should continue to play an important role in investor portfolios as a form of inflation protection.
The yield equivalent in real estate hasn’t moved significantly lower, as spreads over fixed income for real estate have been fairly stable in the last few years. In other words, real estate didn’t fully participate in the last few years of the bond bull market simply because it wasn’t purchased by non-economic buyers in the form of central banks pursuing monetary easing. As a result, the asset class didn’t participate in the last 100 or 200 basis points of the rally in credit. So from a carry perspective, real estate should continue to be attractive.
While some of Trump’s economic plans are beginning to be priced into markets, uncertainty still remains regarding his policies, particularly on immigration, trade and foreign affairs. We think low volatility hedge funds that are truly diversifying, have a low beta to the market and continue to offer a source of less correlated returns will have an important role to play as opposed to long-biased or event-driven hedge funds that have a higher beta to equity markets.
Additionally, given that volatility has been historically depressed due to central bank intervention, the potential rise in volatility coupled with the potential rise in interest rates could make hedge funds as an asset class become increasingly in favor.
While private credit has been a favored alternatives sector of the last few years for institutional investors, it will be important going forward to identify sectors of private credit that can maintain high barriers to entry for traditional banks. We’ve seen of late the banking sector is in the midst of a fundamental repricing on the back of expectations for steeper yield curves, less regulation and lower taxes.
To the extent that banks will once again be able to operate with a degree of greater balance sheet flexibility, private credit investors should ensure they have exposure to sectors that remain unique.
Anton Pil is managing partner at J.P. Morgan Global Alternatives.
