* Bets rise on infrastructure as next UK stimulus
* Investors look to add to holdings in the sector
By Alasdair Pal
LONDON, Aug 19 UK infrastructure funds are
hitting record highs on the prospect of more government spending
after Britain's vote to leave the European Union, bolstered by
the view that the effectiveness of ultra-loose monetary policy
is reaching its limits.
The Brexit vote looks likely to lead to a short-term
downturn in building activity: the latest PMI data shows
sentiment in the construction industry at a seven-year low,
while some infrastructure projects have been held
up on increased uncertainty.
But that weakness looks likely to increase the chances of a
government-backed shot in the arm for the industry, with new
Prime Minister Theresa May open to the idea of using
infrastructure to stimulate a flagging economy.
Fund managers are playing the trend in two ways: through
infrastructure funds that invest in toll roads, hospitals and
schools; and by buying companies that could benefit from any
government-backed boost in building.
Investor interest was piqued by a speech given by May
shortly before becoming PM, in which she promised
Treasury-backed bonds for new infrastructure projects - a
departure from six years of spending cuts under David Cameron's
May has made infrastructure spending a cornerstone of her
industrial strategy, aimed at kickstarting an economy weakened
by Brexit, a move under consideration across developed economies
on fears over the effectiveness of ultra-loose monetary policy.
With Bank of England governor Mark Carney ruling out
negative rates, and UK finance minister Philip Hammond saying he
will take "any necessary steps" to support the economy,
investors are positioning for the use of infrastructure as a
Gavin Haynes, managing director of wealth manager
Whitechurch Securities, has doubled clients' exposure to global
infrastructure funds post-referendum, at the expense of
commercial property and European equities.
"We see it as a global trend - it is not just about Brexit,"
he said. "Traditional monetary policy seems to be running out of
steam to stimulate the economy."
BRICK MAKERS TO BUILDERS
Infrastructure trusts, including those run by III
and John Laing , have hit record highs
post-referendum, extending gains after the BoE cut interest
rates on Aug. 4.
Their performance contrasts with that of property investment
trusts, which that have slumped on fears of price declines as
businesses abandon London as a European base.
"There is a lot of demand for government-backed income
streams," said Colette Ord, an analyst covering property and
infrastructure trusts at Numis. "They are seen as being
That safety comes at a price, however: the average
infrastructure trust investing in government-backed assets is
trading at a 20 percent premium to net assets, an all-time high.
Investors concerned with trust valuations are instead
looking to stocks that may benefit from a pick-up in
construction - from brick-makers to builders' merchants.
Tony Yarrow, a fund manager at Wise Investments, has been
adding to his holdings in the sector, that include construction
company Kier and brick-maker Ibstock.
"If I were May or Phillip Hammond I would be saying 'the
environment has changed: we can borrow as much money as we want
almost for nothing'," he said.
"There is a massive need for infrastructure in the UK."
Part of the attraction for Yarrow of a company like Kier is
that a large chunk of its revenues come from more stable
sources, including motorway maintenance and refuse collection.
Analysts at Barclays estimate the UK requires 215 billion
pounds of investment to replace ageing utilities infrastructure
and wean the economy off carbon-based fuel.
"Construction companies are priced as though they are in an
economy that is going into recession, but if there is any sort
of stimulus valuations look pretty attractive," Yarrow added.
Costain is the most exposed to the theme, with 90
percent of its revenues coming from UK construction, according
to JP Morgan, followed by WS Atkins, Interserve
and Kier. Balfour Beatty and Carillion could
also see a boost, the bank's analysts said.
Stephen Bailey, a fund manager at Liontrust, and whose fund
is among Kier's largest shareholders, has also been adding to
holdings that he believes have been unfairly penalised.
"Central banks have got to be quite inventive: most tricks
have been tried," he said. "I'm not a believer that cutting
rates will stimulate growth, but construction could be a way of
providing that kind of stimulus."
(Editing by Vikram Subhedar and Toby Chopra)