Anticipation of new investment boosts value of UK infrastructure funds

Natasha Levanti
31 August 2016

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Infrastructure investment

While UK businesses involved in building saw an initial downturn after the EU referendum, after the lowering of the interest rate UK infrastructure funds and building stocks are now a key focus of investors and fund managers.

This attention is, at least for now, creating a boost for UK infrastructure funds and stocks within the building sector.

Around the world and in the UK, monetary policy (regulatory actions to determine the size and growth rate of the money supply) is the main method used to stabilise the marketplace, as seen through the lowering of the interest rate. 

Investors' interest in infrastructure and industry funds were likely spurred by Theresa May’s speech shortly after becoming prime minister which contained a promise of Treasury-backed bonds for new infrastructure projects within her new industrial strategy. As an apparent change from six years of cuts in spending, this flagged to investors that May could be open to infrastructure as an option for breathing life back into a faltering economy. 

As the economy fluctuated after the referendum, UK chancellor of the exchequer Philip Hammond said that he will pursue any needed steps to support the UK economy, signalling to investors that with current economic uncertainty, the government may find itself in a situation where it is willing to borrow in order to stimulate the economy.

If that wasn’t enough to change the priorities of investment managers, to counteract the economic downturn Mark Carney, governor of the Bank of England, lowered the interest rate while at the same time ruling out negative rates being enacted in the future, signifying a limitation to the monetary policy alterations the UK is willing to undertake.

All these indicators have spurred investment managers to actions which are, for the time being, boosting the value of UK infrastructure funds as well as stock within the building and construction sector.

If one follows the investment trail, this investor preference shift can be seen in two main investment moves - increased investments in infrastructure funds focused on community essentials like roads, bridges, hospitals or schools, and through the investor purchasing of companies that would be on the receiving end of a government investment in building. 

To see this more clearly from an investor's perspective, compare infrastructure trusts with property investment trusts. After the Bank of England cut interest rates in early August, infrastructure trusts have risen in value, while property investment trusts have continued to decline. Additional to this is the observation that those infrastructure trusts directly dealing in government-backed assets are trading at a record post-referendum 'premium to net asset' ratio, an indicator of its current value to investors. 

It is clear that investment managers are weighing up the potential moves by the UK government to further stabilise the economy, shifting investments from property for which a continued decline is anticipated to infrastructure trusts, which presents itself as a viable option as the Bank of England reaches the end of monetary policy and the government looks to implement the new prime minister’s industrial plans.

This shift in investor preferences can also be seen in the recent positive investment movement to the stock of those companies that are seen to be directly involved in construction, and would therefore benefit from any increased activities in the sector. 

While the industry is keen to see government commitment to infrastructure projects, investment indicators continue to reveal that infrastructure may be seen across disciplines as the way forward as the government looks to stabilise the economy.