Biden’s Big Infrastructure Plan: What’s in it for Investors?

Summary

• President Biden aims for a large-scale infrastructure program with his upcoming four-year $1.9tn plan.
• But it is unlikely to be enacted before late 2021 and may have to be curtailed somewhat to get through Congress.

Market Implications

• Investors have already anticipated much of this, with the clean energy and electric vehicles sectors massively outperforming the S&P 500 in 2020. The easy money has been made here and they may be more volatile going forward.
• Traditional infrastructure ETFs have lagged and may appeal to investors looking for more stable and dividend-oriented returns.

US President Joe Biden’s fiscal spending plans echo Franklin Roosevelt’s New Deal during the Depression: relief and recovery. ‘Relief’ is the proposed $1.9 trillion Covid bill likely to be enacted in coming weeks through the Senate reconciliation process.^[1] That money will be spent over the coming year. And ‘recovery’ is the oft-mooted $1.9 trillion infrastructure program spread over four years – our topic here. The Biden administration is yet to release a formal proposal or plan. One will presumably come after completion of the Covid relief legislation.

Everyone Loves Infrastructure

Most of what we know about Biden’s planned infrastructure program comes from his campaign and from statements after the election and his inauguration. Boiled down to essentials, it calls for extensive rebuilding and repairing of roads and bridges, and investment in public transit, clean energy, and electric vehicles. It would also improve housing and the power grid.

A comprehensive infrastructure program should theoretically attract bipartisan support. The issue has been out there for years – it was a big element in the 2016 presidential campaign, and infrastructure problems have only worsened since then.

Where Will the Money Come From?

The one big detail yet to be revealed, and a likely sticking point, is how Biden will pay for this program. To put it in perspective, we are talking about $500bn annually. That seems modest given that the federal government will end up spending almost $6tn over two years to address Covid.

But, hypothetically, two sources of revenue are raising the gas tax and imposing a carbon tax. The federal gas tax raises about $36bn a year. Were it increased to reflect inflation since 1993 (when it was last reset), it would bring in an additional $30bn – a drop in the bucket.

One carbon tax proposal that has attracted interest would impose a rate of $50 per tonne of emissions and raise $2tn over 10 years, or $200bn per year. Apart from being far short of $500 billion, the rub with most carbon tax proposals is that they are revenue neutral – tax cuts and credits elsewhere would offset them. While some carbon tax revenue probably would be channelled to infrastructure, it is unlikely to be anywhere near the full amount.

That probably leaves debt financing for much of the program. Republicans, now enamoured of fiscal rectitude, are sure to resist spending on the scale that Biden targets. If the administration goes through the normal Senate process, it will have to severely curtail Biden’s proposals to overcome a Senate filibuster.

That leaves reconciliation as the likely route to enact most of Biden’s infrastructure program. Senate rules generally allow one reconciliation bill per fiscal year, and they only cover programs that have some tax or budget implication. It remains to be seen whether all of Biden’s proposals could survive the reconciliation process.^[2] Taken together, it could be almost a year before significant money starts to flow, and the final amount could be somewhat less than the original headline.

Infrastructure Is Already a Crowded Trade

These concerns aside, investors looking to position themselves for a sustained burst in infrastructure may find it already a crowded trade. We compiled a variety of ETFs covering traditional infrastructure (e.g., construction, ports, railroads, utilities, toll roads), clean energy (e.g., wind, solar) and electric vehicles (e.g., cars, autonomous driving, batteries) and created simple indices of their relative price performance over the past two years (Chart 1). Table 1 summarises the ETFs in each sector.

For much of 2019, infrastructure moved roughly in line with the S&P 500 before clean energy started to surge. Since the March 2020 selloff, clean energy and electric vehicles have rallied massively, outperforming the S&P 500 by 230% and 180%, respectively. Traditional infrastructure, which is mostly well-established companies, has basically moved in line with the broader market.

The rally in clean energy and electric vehicles appears frothy. But given the prospect of the infrastructure investment to come, it is difficult to argue against the future growth prospects these sectors offer. That said, there is little question that the easy money has been made here. Investors who open positions in these sectors now should be prepared to ride out some volatility as debate heats up about the scope, nature and timing of Biden’s infrastructure plan.

Meanwhile more traditional, dividend-oriented infrastructure should do better as money starts to flow, but its primary benefit for investors is dividend income rather than capital gains.

1. Under Senate reconciliation rules, tax and budget legislation can be passed with a simple majority vote. They are not subject to filibusters that require a 60% majority to pass. ↑

2. To cite a current example of this fuzzy process, it is widely thought the proposal in the Covid legislation to raise the minimum wage to $15 will not survive reconciliation because it does not directly affect federal taxes or spending, even though it could indirectly raise tax revenue over time if people earn more. But this remains subject to interpretation, and it could survive. Some of Biden’s infrastructure program may also be deemed not to have direct fiscal impact and could be subject to similar scrutiny. ↑