Investing in infrastructure stocks can be a lucrative way for Australian investors to tap into sectors like energy and transportation. But because of government intervention, the pace of infrastructure growth can be uncertain.
What are infrastructure stocks?
Infrastructure stocks are tied to companies and organizations responsible for providing essential services to cities and facilitating the transportation of goods and people. Look at it as the underlying grid that keeps an industrial economy running.
With that said, infrastructure stocks provide exposure to a swath of different companies and sectors. Here are some examples of industries and companies involved in infrastructure:
- Mass transit
- Water supply
- Sewage management
- Roads and bridges
- Electric companies
- Telecommunication systems
- Oil rigs and refineries
- Waste disposal
But infrastructure goes even deeper than that. The above industries are what’s known as hard infrastructure. Soft infrastructure, on the other hand, comprises industries that deliver specific services to people in the communities they serve. Here are some examples:
- Financial institutions
- Education systems
- Law enforcement
- Governmental bodies
- Agriculture
- Healthcare systems
You can also find infrastructure stocks in the tech space, specifically within information technology. Companies that make servers and other networking equipment essential for the transfer of data are part of the infrastructure industry. They build equipment that’s essential to how many businesses operate and communicate.
Infrastructure is a vast industry that affects several aspects of our everyday lives. And the players in this industry are equally diverse. They include private companies, government agencies and public/private partnerships.
Why invest in infrastructure stocks?
Many Australian investors turn to infrastructure funds because these investments tend to be less volatile than other types of equities in the long run. Historically, these have generated high yields and have remained less responsive to interest rate fluctuations than other investments.
Moreover, global infrastructure investments have outperformed equities by almost 1% and bonds by nearly 4% since 1976. According to the World Economic Forum, worldwide infrastructure investment is projected to reach $US 79 trillion by 2040.
Moreover, infrastructure is also essential to any modern, functioning economy. Companies need roads to transport goods and fuel to move goods around. People require electricity, heat, water and waste removal to live comfortable lives.
Infrastructure makes all this possible. And its operations also spur job creation.
Risks of investing in infrastructure
Because so many infrastructure projects are essential to modern economies, governments tend to take some control. Political disagreement over how to manage certain projects can have a strong impact on infrastructure investments.
For instance, President Donald Trump announced in 2019 his Administration’s plan to invest nearly $US 1 trillion in infrastructure. But many of these efforts stalled in Congress over political tensions and concerns over the coronavirus.
The latter alone delivered a major blow to the infrastructure sector. Construction and commercial projects slowed or came to a halt as millions of people’s jobs were eliminated.
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Bottom line
Infrastructure helps industrial economies stay afloat. But because infrastructure networks can be very complex, there is uncertainty over which companies and industries will thrive.
Nonetheless, infrastructure investments historically have remained less volatile than other equities. Because infrastructure is vital to many economies, governments can play a large role in regulating certain sectors. That adds another layer of uncertainty.
If you’re interested in taking a stab at infrastructure stocks, compare trading platforms.
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