De-construction: Navigating the Investment Landscape of Infrastructure, HS2, and Housebuilding

Susannah Streeter: Hello and welcome to Switch Your Money On. I’m Susannah Streeter – the Head of Money and Markets here at Hargreaves Lansdown – and I’m in the studio with Sarah Coles – the Head of Personal Finance.

Sarah – the nights have drawn in now. It’s very bright in here but it’s dark outside – seems like most of the day – and it has given me a bit of an urge for an autumn clean-out before we hunker down properly for the winter, and it’s all ahead of a bit of building work I’m hoping we’ll do in the spring.

Sarah Coles: Yes – I think we probably need to do some building work – for all the junk that we’ve accumulated – so maybe an extension – perhaps another garage – that should just about cover it.

We’ve actually been planning some building work for a really long time now, and I’m constantly amazed at how many hoops you have to jump through – plus, of course, there’s the great joy of having to fund it as well.

Susannah Streeter: Absolutely – and it’s not just happening at your house, Sarah – it’s on a much bigger scale. Construction in the UK is moving at a snail’s pace.

The latest poll of purchasing managers at UK construction firms showed activity dropped for the second consecutive month as new projects proved thin on the ground. Housebuilding fell particularly sharply in response to lower demand from buyers and higher borrowing costs – thanks to interest rate rises. It means we’ve now had 11 consecutive months of falling housebuilding.

Sarah Coles: Yes – and look what happened with HS2. That was scaled right back because it went so far over budget, and so infrastructure projects seem to cost a lot more here to pursue compared to other countries.

Susannah Streeter: And, as a result, it seems the UK is falling behind the curve when it comes to investment in infrastructure – particularly when you compare Britain with other major economies around the world.

So, what are the prospects ahead for big infrastructure projects and what could it mean for companies operating in this sector?

Sarah Coles: That’s what we’re gonna be delving in in this episode, which we’re calling ‘Deconstruction.’

Susannah Streeter: I see what you did there [laughs]!

We’ll be talking to Kingsley Clarke – Operations Lead at Southern Construction Frameworks. He has the task of making sure that public money goes as far as possible – when it comes to getting big things built – and is very much the linchpin between contractors and local authorities.

Welcome, Kingsley – it certainly seems as though [laughs] you’ve got an unenviable task at times! – given the current climate – is that how you see it?

Kingsley Clarke: Yeah – it’s fair to say it could be an absolute challenge but I do love the challenge and so that role of connecting the public sector with contractors and making sure the public money goes as far as it can do. Always a challenge but one that I enjoy – hopefully I can share some tips.

Sarah Coles: That’s great – we look forward to digging into this a bit more later in the podcast – although that really should be the end of the construction puns.

Susannah Streeter: Okay! We’ll also chat to Sophie Lund-Yates about some of the listed companies operating in the sector – and we’ll talk to HL’s Environmental, Social and Governance Analyst – Laura Hoy – about some of the environmental and social considerations of building – and, as usual, we’ll hear from Emma Wall – our Head of Investment Analysis and Research – who’s been looing at this from a funds perspective.

Sarah Coles: But let’s look first at where the UK stands right now – when it comes to big infrastructure projects.

So, according to the Institute for Public Policy Research, the UK has seriously slipped down the global investment league.

Susannah Streeter: Yes – business investment is lower in the UK than in any other country in the G7 group of rich nations, and 27th out of 30 OECD countries with data available ahead only of Poland, Luxembourg and Greece.

The report highlights a number of reasons for this – including a severe shortfall in public and private investment stretching back over several decades. The research also underlined that Britain had ranked below the G7 average for the last 18 years for spending not just on infrastructure, but also research and development, skills and training.

Sarah Coles: Is Brexit partly to blame?

According to a report by the thinktank ‘UK in a Changing Europe’ – published in September – the UK hasn’t been able to replace all the investment it used to get from the European Investment Bank. So, the EIB has financed some of most critical infrastructure projects in the UK over the 46 years that it operated in the UK – investing £146bn into the country – so that’s an average of £6bn a year – in real terms – over the course of that period – but, following the referendum on EU membership, the UK lost access to EIB finance.

Susannah Streeter: Now, the UK did create – or expand – four development bags to try and replace this lost investment, but they’ve only been able to replace a third of it – and, when you look at super-important sectors like infrastructure, this is even lower – a little more than an eighth has been replaced. And what’s become the main replacement for the EIB – the UK Infrastructure Bank… well, that’s not been able to reach its investment targets to date.

Sarah Coles: So, it’s clear the UK is finding it harder to access funding – but what about projects that do get off the ground? Why have they run into such difficulties?

Let’s look at HS2, which has careered into difficulty – so much so that the second northern leg has been scrapped.

So, what went wrong? Well, it went seriously overbudget. The leg between London and Birmingham – which is still going ahead – a stretch of 134 miles of track is forecast to cost £53bn – and that’s according to analysis by Remade. That works out at £396 million per mile, which will make it the most expensive of any completed above-ground railway project in the world.

Susannah Streeter: Eye-watering – and, if you compare it to the French High-Speed line from Tours to Bordeau – which I’ve been on and loved – it’s more than eight times the cost per mile of that stretch of track. Cross-rail was also delayed by years – and that was billions of pounds overbudget.

Now, part of the reason is to do with our planning system. Under European systems, planning criteria are set out in advance more clearly and it means projects are usually accepted with little prospect of major revisions. The UK planning system – rooted in common law – means the State has to gain approval and it means effects need to be mitigated as the plans evolved – and the effect of this is that planning applications for infrastructure projects are often very long – requiring many hundreds of documents.

We’ll find out from Kingsley in a moment what this means in practice.

Sarah Coles: But then, of course, there’s the lack of skills – and I don’t just mean the fight for labour that we’ve discussed on this podcast, but the lack of skills in terms of those managing the projects.

So, the lack of internal knowledge within governments has been blamed for the need to outsource the design and construction phases of the project to private contractors – which can push up costs further – whereas, in many European countries, often initial designs are completed by engineers employed by the State – and then contracts are awarded.

Susannah Streeter: Then, there’s the problems posed by runaway inflation. Contractors may be working on contracts that were priced up before it took hold, so their margins are being devoured by inflation and rising prices – and we’re gonna see that in the projects being completed further down the line.

So, it’s a toxic combination of reasons why budgets keep ballooning – making infrastructure projects more expensive.

Sarah Coles: These drawbacks – compared to Europe – are not unique to the UK. So, planning systems in the US have also come under criticism. However, the US has ploughed ahead – nonetheless – with a huge infrastructure stimulus – known, rather counterintuitively, as ‘The Inflation Reduction Act.’

Susannah Streeter: So, the goal is to reduce carbon emissions by 40% by 2030 – but, in the process, the White House says it will drive £500bn-worth of investment in the private sector through projects focused on clean energy, conservation and green infrastructure. It’ll invest in domestic energy production and manufacturing capacity, field developments in tech – like carbon capture and green hydrogen – and, crucially, it will reform the US planning system to get energy and transmission projects off the ground.

Sarah Coles: The EU has responded to the act with its own Green Deal Industrial Plan and NetZero Industry Act – however, at this stage, we’re still awaiting details on how the UK might step up its game in response. Meanwhile, the Shadow Labour Government has promised to revitalise the British economy and get Britain building again – partly by fast-tracking planning decisions and examining every major infrastructure project to try and speed things up – but it’s not clear exactly how that will be achieved.

Susannah Streeter: Let’s speak to Kingsley Clarke – who is knee-deep in these types of projects all the time.

So, Kingsley, how easy will it be to speed things up?!

Kingsley Clarke: The sad reality is, if they’re on-site – or we’re hearing about them in the news – from an active perspective – probably not at all – and it comes back to going straight back to the beginning – at project inception – and speeding those along, rather than trying to work with what we’ve already got in the system.

Sarah Coles: So, you talk about the problems right at the start. What actually are those problems in the planning process?

Kingsley Clarke: You touched on a few. The system in the UK is very different to what we see on the Continent, where consultants – contractors… the State all work together to bring a project to fruition.

Over in the UK, we tend to work in silos – particularly with designers putting together plans for review by a planner who will then come back to them – and it becomes a rather staged process that just takes a lot of time – and, unfortunately, we often don’t bring the contractor to that table until far down the process. So, the thought of how we’re actually going to build something on the ground is just left to be dealt with once planning is approved – often with conditions that aren’t achievable for the contractors.

Susannah Streeter: To what extent is the planning system to blame for cost overruns and how could it be improved?

Kingsley Clarke: The planning system’s an easy one to blame for all of our woes because, at the moment, it’s struggling under pressure with demand. Local authorities we’re seeing across the piece are struggling with finances – and planning is obviously a key part of that – and there’s a skill shortage in planning. So, it’s easy to blame everything onto planning.

Part of the problem is we don’t embrace the process properly. We’re not including consultants and contractors early-on to develop a plan that planners can approve once and so, instead, we develop a plan – we bring in the contractor – we have to change the plan – which requires more capacity from the planning authorities and more for us to then tie them up with, rather than approving the new thing.

So – yes – it can be slow and cumbersome at times but, ultimately, they are something that we can work with if we engage properly – particularly with consultants and contractors to collaboratively work a project together.

Sarah Coles: D’you think then that there is a way to make the State and the private sector work better together – and what way is that?!

Kingsley Clarke: [Laughs] It’s probably fair to say – in any industry ever – you could always get the private sector and the State working together. In construction, clearly, that’s quite acute at the moment and one of the biggest problems we have is the acceptance that our private sector companies delivering projects need to operate and have a reasonable level of overhead and profit.

We – in the public sector – like to pass risk down the supply chain. So, inflation being the great example – we like the private contractors to hold that inflation risk. Inevitably, they will but they’ll charge for it, but then that risk will continue to be passed down the supply chain – to, frankly, those who aren’t best-placed to have it. So, if we want to work better, we need more grown-up conversations about the allocation of risk and more realistic expectations of what overhead and profit would look like. There’s so many headlines and so many big projects out there that are released and overheads and profits are at 2%, 3% – when that is just not enough for a construction company to operate.

Susannah Streeter: So, if you could wave a magic wand and solve the UK’s building problems, what would that look like?!

Kingsley Clarke: It would look like everybody around a table at the beginning of the idea – not once it’s been designed – not once we’d already worked out how to do that – and that would include your planners – the public sector bodies – who are specifying based on outputs, not on exactly what is gonna happen. All too often, we see tenders with, ‘This is the exact route of the line that’s going to go down this area.’ We don’t bring the private contractors in to help us use their innovation – and to help us improve the offer – to deliver the same outcomes, but often for much less money.

Sarah Coles: So, moving slightly more into things are happening right now… I wanted to talk a little bit about the cancellation of that leg of HS2. How much damage does something like that do?

Kingsley Clarke: It’s interesting, isn’t it? I’d say – in terms of the construction industry and what we’re doing – it’s probably not done as much damage as… or considering - we have a skills shortage in construction and construction’s turning over hundreds of billions a year – so, whilst it’s got a huge headline-grabbing impact, the impact to construction is probably lesser. Those skills can easily be reallocated to all of the other projects that are crying out for skills and labour within the construction industry.

So, from that perspective, maybe not at all, but you’ve touched on the investments risks and the companies wanting to come to the UK and deliver these huge infrastructure projects. Clearly, that is gonna make a difference and people are gonna look at that as a yardstick about whether or not the UK is serious about delivering on the big projects that are out there.

Susannah Streeter: And then will that have an extra impact on the risk that they’re willing to take and will that mean that they’ll push up what they’re willing to pay for coming into that project?

Kingsley Clarke: Very likely – ultimately that is what the contractors are doing when they bid or look at any project. Probably 100% of the contracts awarded, the contractors are making money during construction – not in the stages of planning and etc before. So, delays like this – problems like this make contractors need to consider how they recover money during a preconstruction phase before the big boots on the ground and the shovels are in the ground. That’s only gonna drive up prices for us all.

Sarah Coles: D’you think it’ll have an effect on whether those transport projects come to fruition at all?

Kingsley Clarke: Quite possibly. Inevitably, contractors are going to be looking at that very carefully – but, at the end of the day, if the drive becomes there – and, if the drive from the public sector – the State – is there to make these projects happen… The private sector will come to the table because – let’s be frank – they want to deliver those projects, but they’re gonna be coming to the table with a slightly more cautious approach – maybe it will actually inject some more early realism into what the cost should be.

So, rather than having a debate – and we look at HS2, where much of the properties, for example, have already been bought before and now the project has been cancelled… ‘What happens to those properties down the route?’ It’s going to bring to a head – hopefully – a reality of what things will cost before we go too far down and expend too much money. Maybe there’ll be a benefit.

Susannah Streeter: You talked about this real need to get everybody round the table right from the beginning. Who’s responsible for driving that change? Is it central government or local authorities as well?

Kingsley Clarke: I think everyone has to take their role in it. I mean, clearly, with a project like HS2, it’s going to be central government – it’s a huge project cutting across lots of different local authorities – but we see it all of the time with local authorities commissioning highways projects – commissioning new schools. All of those projects – there needs to be a groundswell – and so everybody – every client – shares that responsibility to bring all of the parties to the table sooner.

You talked about your own extensions and suchlike. When we consider those – 9 times out of 10, the first call we make is to a contractor – not to an architect – not to a consultant – not to the planner – but, in the professional world, we’re doing it the opposite way around and that’s the bit that needs to change.

Susannah Streeter: Seems hard to talk about this right now [laughs] – given all that you’ve said and how we’ve looked at all the problems! – but where d’you think the real opportunities are right now – particularly in the UK?

Kingsley Clarke: One opportunity with the news with HS2 – clearly, there’s a lot of skills there. Let’s keep those skills in construction and let’s move them to help us increase the pace of all of the other projects out there. So, that’s a good opportunity for us.

Government recently published ‘The Construction Playbook.’ It’s a follow-on from Egan and Latham’s Reports – it’s another roadmap for what we can do better. So, collaboration – ‘Let’s get talking’ – there’s lots of routes out there where the public sector can engage early with contractors, and we just need to seize that opportunity – particularly while the skills are perhaps more prevalent at the moment – with HS2 not continuing in the way we expected.

Susannah Streeter: Okay, Kingsley. Thank you so much – be really interesting to see what the future holds in store – whether that playbook will be read and acted on, and whether the UK can get to grips with some of these thornier infrastructure issues. Thanks so much.

Kingsley Clarke: Thank you.

Susannah Streeter: So, let’s bring in Sophie Lund-Yates now to explore some of the listed companies that might be interesting here.

Sophie – you’ve been looking at Balfour Beatty, haven’t you? Pretty topical focus here, given what we’ve been discussing!

Sophie Lund-Yates: Hi, Susannah – I have, indeed.

Balfour Beatty is one of the companies involved in HS2. The group is a construction and support services giant that deals with major projects – largely civil – including things like transportation and energy infrastructure.

Sarah Coles: How will the changes to HS2 affect Balfour Beatty?

Sophie Lund-Yates: The reigning-in of projects isn’t great news for anyone hoping to bid and win contracts, but this project isn’t the only thing on Balfour’s books. It has an extensive order book of around £16bn.

There are other challenges swirling that don’t purely centre on HS2. As much as the order book’s still sizeable, it has shrunk. There’s a lot of economic uncertainty – and that’s causing some US commercial customers to delay contracts. When the economy shrinks – or things look unsteady… you know, people are far more likely to hit ‘Pause’ on big spending, and this nervousness is partly why the group’s valuation has seen a 19% knock in their first half.

There are, absolutely, still strengths – the group offers essential services but margins are challenging in this arena. A particular area of positivity is demand for hospitality and aviation projects over in the US but, of course – as I’ve eluded to – with a company like this, ups and downs are par for the course – so that is something to remember.

Susannah Streeter: Rumour has it, you’ve also been looking at a well-known name in the infrastructure arena to none other than JCB. What can you tell us?

Sophie Lund-Yates: It had to be done. I’ve had the JCB song [laughs] stuck in my head for days! The price we pay for this podcast!

In all seriousness though, you’ve already touched on one of the core elements of JCB – and that’s its brand. Large-scale construction – or agriculture – calls for machinery that can be trusted – both from a safety and quality perspective.

Unfortunately, I won’t go into too much detail as JCB remains family-owned – and it’s not a listed company. So, if anyone wondering why we’re doing an infrastructure episode – and not talking about the famous yellow diggers – that’s why.

Sarah Coles: Thanks, Sophie. So, who have you dug into instead? Sorry – I promised no more puns!

Sophie Lund-Yates: Ashtead are a UK-listed construction giant. They’re more involved in the rental of equipment for the kits needed for large infrastructure. Markets are perhaps a little spooked by UK guidance – which was moved down – but North America is the real growth driver – and, with group expectations intact, we aren’t too concerned.

The medium-term looks promising as the ongoing expansion into North America starts to yield results – both the US and Canadian divisions benefitted from higher rates and volumes. There are several growth drivers in the region – from the onshoring of supply chains to government legislation looking to expand infrastructure and chip manufacturing.

Ashtead’s scale and expertise should place it well to be a key supplier for large-scale projects. The bigger players often have an advantage in the fragmented industry and the balance sheet’s being flexed to snap-up smaller players in the space.

We’re also supportive of the rental model, which allows customers greater flexibility and helps to counter ongoing supply chain issues. The proportion of equipment owned by rental companies has increased dramatically – and, last we heard, Ashtead believes the 55% seen in the US has room to grow. We’re inclined to agree when you consider that the rental proportion of equipment in the UK is at 75%.

Debt has risen as investment in expansion continues, but the balance sheet is in reasonable health and means the group can invest to meet the extra demand – opening new stores, expanding its rental fleets, and pursuing its strategy of bolt-on acquisitions, where appropriate, too.

Susannah Streeter: What about the risks here?

Sophie Lund-Yates: As I’ve mentioned, construction is inherently cyclical, so companies in the sector are somewhat at the mercy of economic activity. So, overall, there are several structural tailwinds blowing in Ashtead’s favour – and it’s scale puts it in a better position than some – but there are likely going to be some wobbles along the way.

Sarah Coles: Thanks, Sophie – and what’s the final name?

Sophie Lund-Yates: I’ll keep this brief – as it’s a name that’s cropped up before on previous episodes – but Caterpillar needs to be talked about in the context of infrastructure. So, it provides seriously heavy-duty kit – including the types of machines that are used by miners to get raw materials out the earth – and we’ve recently had results from the company and that showed third-quarter revenue of £16.8bn, up 12%. Growth was largely driven by higher prices – with higher volumes providing a smaller boost. The three core segments within Machinery, Energy and Transportation all helped contribute to growth.

Operating profit rose 42% to £3.5bn, as the vast majority of the revenue uplift from higher prices and volumes fed through to profit.

Fourth-quarter sales are expected to be slightly higher than last year, while margins are expected to tick a little bit lower quarter-on-quarter. So, ME&T free cash flow is expected to exceed the $4-$8bn range for the full year. Now, the market will remain sensitive to changes and expectations for demand, so that is the element to monitor.

Susannah Streeter: Thanks, Sophie – it’s definitely going to be an interesting time for all sorts of businesses in this area – but, of course, anyone involved in infrastructure building also needs to consider the environmental and social challenges as well.

So, let’s bring in Laura Hoy here.

Laura – this is a big area for ESG, isn’t it?

Laura Hoy: Thanks for having me.

You’re absolutely right – infrastructure is one of those pockets of the economy that really sparks a debate around how to weigh up the environmental cost against the need for growth.

Sarah Coles: So, what are the main environmental risks?

Laura Hoy: When we think about infrastructure and construction, cement is really at the top of our minds. It’s a huge contributor to global emissions – responsible for around 8% of the world’s CO2 emissions. To put that into perspective, that’s more than the aviation industry.

Susannah Streeter: Is there a way round this, Laura? It’s hard to imagine that growth and infrastructure doesn’t come with growth in cement usage!

Laura Hoy: You’re absolutely right – we are very dependent on cement. It’s necessary for roads, bridges, buildings and everything in-between.

There are some ways that companies making and using cement can lower their impact. Clinker – which is a commonly used binding agent in cement is extremely carbon intensive because of the energy required to heat it and the carbon released by the limestone when it’s hot. But there are ways to tweak this process and make it less harmful – for example, using carbon-neutral energy to power the process. There’s also an argument for reducing demand on clinker overall. Some companies are looking at substituting it with waste materials like coal ash.

Sarah Coles: If subsitution’s an option, why isn’t everyone doing that? It sounds like a win-win.

Laura Hoy: It’s worth exploring, and there are many companies out there working on just that – from replacing clinker with alternatives to using lower carbon versions – but, given that cement is such a critical resource, we have to be careful not to rush into anything. While environmental concerns loom heavy, construction and materials companies have to balance these off against the social risks. Product quality is so important because cement goes on to be used in bridges and buildings and that needs to be safe.

Susannah Streeter: Yes – so I suppose we’re now seeing the consequences of inadequate safety research around the UK’s schools with shoddy concrete are being forced to close.

Laura Hoy: Exactly. The concrete used in the schools you’re talking about was chosen because it was a cheaper alternative. At the time, it was deemed safe but, years later, we’re seeing that some weaknesses were unfortunately overlooked. That’s something materials makers want to avoid as they look to develop carbon-friendly versions of cement. The good news is that preliminary research suggests that 30-40% of clinker used in the cement industry could be replaced without compromising the cement’s strength. So, while there’s no easy net-zero solution, we can start making small adjustments that put us on the right path.

Sarah Coles: So, if you’re wanting to make sure your investments prepared for a lower carbon economy in the future, what should you be looking for?

Laura Hoy: The main thing to consider is whether or not they have clear, defined net-zero commitments in place. Companies that make clinker will have to consider all of the issues that we’ve just spoken about, but many companies buy the stuff so it wouldn’t be included in their direct emissions. In those cases, it’s really important that indirect emissions are also included in their targets. That means they’ll be seeking out suppliers who are taking steps to reduce their carbon footprint.

Susannah Streeter: Thanks, Laura – this is clearly a key issue when thinking about infrastructure firms, isn’t it?

But what about funds? Let’s bring in Emma Wall – our Head of Investment Analysis and Research. She’s been speaking to Peter Meaney – Manager of the First Sentier Global Listed Infrastructure Fund.

Emma Wall: Hi, Pete.

Peter Meaney: Hi, Emma.

Emma Wall: You were one of the first guests [laughs] on this podcast series when we kicked off nearly two years ago. At the time, we talked about infrastructure. We’re going to talk about infrastructure again - however, the macroeconomic environment is pretty different.

Before we dig into the impact of inflation on interest rates on the asset class – just broadly, can you give us an overview of why you’d invest in listed infrastructure? What does it bring to a portfolio?

Peter Meaney: What I like about infrastructure is the tangible nature of what we invest in. These are assets that people use every day – electricity, water, gas utilities, toll roads, airports. Maybe you’re travelling through them now while you’re listening to this podcast. Relatively simple to understand how these companies make money – and I think that’s important for investors in a pretty complex world.

Secondly, I think there’s a good source of income. What we’d like beyond that income or bond is the long-term structural growth drivers. Infrastructure’s about solving some of the world’s long-term challenges – decarbonisation of energy through investment in renewables and transmission and batteries to support that. Resolving urban congestion with more roads and railroads to move people and goods more efficiently around the country. I think also digital communications – making sure that 5G is available for people to use wherever they are – and the data centres that support not only that use of data, but also evolving things like artificial intelligence. It's an exciting combination of simple things to understand, a good source of income and long-term growth.

Emma Wall: Income with infrastructure has often been seen as an alternative source of income to your typical equities or bonds and, therefore, it has been a popular addition to portfolios for diversification. But all income assets have been flipped around a bit by rapidly rising inflation over the last year, and then inflation beginning to come off – but interest rates coming up – and so we’ve seen it amongst our own clients – the rush to cash. What has that done to both demand for the sector – listed infrastructure – for you – but also, presumably, this has created quite a few value opportunities for you?

Peter Meaney: It’s been a really interesting dynamic, the last two years. 2022 was an excellent year for infrastructure. So, in sterling terms, you were seeing a positive 5% or 10% return from the asset class in a market – global equities market – down 5% or 10%. One of the key reasons for that was the inflation hedge. As inflation picked up from 1% or 2% to 8% or 10% in many parts of the world – that is, on balance, a benefit for infrastructure. The vast majority of our companies – 70-90% of a typical infrastructure portfolio would have the ability to pass that through. So, a contracted toll road – where prices go up by CPI on, say, 1 February each year… for a regulated utility – UK water utility – where they earn a real return on capital plus [s.l. faster 29:09] inflation.

The many examples we saw of that ability to push through inflation – and that drove a very positive return profile in 2022… what happened in ’23 was exactly as you pointed out – that inflation started to roll over – so we lost that positive hedge story – and then a real push-up in interest rates started to occur. So, it’s that rise in real interest rates that does impact the valuation of infrastructure companies – and, while I think the move in the US 10-year bond yield from 2% to 3% to 4% was largely anticipated by the market – and by us – the scare that we could go to 5% or even 6% certainly impacted valuations of some of these more bond-yield-sensitive sectors like infrastructure.

So, 2023 has been more difficult, but that’s presented a very interesting valuation level for us as we stand today.

Emma Wall: Now, Pete, nothing is guaranteed but, from here – if you look at the yield surve, for example, it’s indicative that rates stay higher for longer – and they do start to come down – it is expected – by this time next year. For you, what is your outlook then for listed infrastructure with that kind of expectation of, ‘Higher for a bit longer but then rates start to come off?’

Peter Meaney: That’s a really exciting environment for infrastructure. If we get a period where interest rates do come off from 5% back towards 4%, for example – inflation stays stubbornly high in that 3-4% range – you’re right, we don’t know what the future holds – particularly in the very short-term – but I think, on a medium to long-term view, we’ve got higher income than normal. We’ve also got higher growth than normal because of the significant investment, for example, in decarbonisation. We’re seeing some of our utilities push up growth from 2% to 4% to 6% or even 8%. So, more growth, more income and valuation levels lower than normal.

Emma Wall: Pete – thank you very much.

Peter Meaney: Thanks for your time, Emma.

Susannah Streeter: That was Emma Wall speaking to Peter Meaney – Manager of the First Sentier Global Listed Infrastructure Fund. Please bear in mind that these are the views of the Fund Manager and are not individual stock recommendations.

You’re listening to Switch Your Money On from Hargreaves Lansdown – and now, to end this episode, we have a quick stat of the week.

The Royal Institution of Chartered Surveyors puts together construction activity index by country. Its report for the third-quarter of this year – the top-five in reverse order were the UAE in fifth place, then Mauritius, then the Philippines – and, in second place, it was India.

So, Sarah, can you guess who was first?

Sarah Coles: I’m not sure. Given all the talk about that Inflation Reduction Act, I should say the US, but I just know I’m gonna be wrong.

Susannah Streeter: You are, I’m afraid – you are wrong. The US came in ninth – just ahead of Ireland. The answer was Saudi Arabia, and – in case you’re wondering – the UK had a negative reading along with much of Europe, including France and Germany.

Sarah Coles: All this is starting to make me feel a little bit better about how long it’s taken for us to do a bit of work on our house – although, given how the dormer shakes in the wind, I’m not sure it ought to wait much longer.

Susannah Streeter: Yes, I’m actually looking forward to getting stuck in next year – although it’ll probably be 2025 by the time we get round to it [laughs]!

That’s all from us for this time but, before we go, we do need to remind you that this was recorded on November 13th 2023, and all information was correct at the time of recording.

Sarah Coles: Nothing in this podcast is personal advice – you should seek advice if you’re not sure what’s right for you. Investments rise and fall in value so you could get back less than you invest – and past performance is not a guide to the future.

Susannah Streeter: Yes – this is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment and investors should form their own view on any proposed investment.

Sarah Coles: And this hasn’t been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.

Susannah Streeter: Non-independent research is not subject to FCA rules prohibiting dealing ahead of research – however, HL has put controls in place – including dealing restrictions, physical and information barriers – to manage potential conflicts of interest presented by such dealing.

Sarah Coles: You can see our full, non-independent research disclosure on our website for more information.

So, all that’s left is for me to thank our guests – Kingsley, Sophie, Emma, Peter, and our Producer, Elizabeth Hotson.

Susannah Streeter: Thank you so much for listening. We’ll be back again soon – goodbye!

Transcript ends 33:51