Infrastructure boom will be a bumpy ride for investors – The Globe and Mail – Dec 16 2016
Guy Dixon
Published December 15, 2016 Updated March 24, 2017
Tens of billions of dollars in new highway work, mass transit and other infrastructure proposed by the Trudeau government over the next dozen years should have investors sitting up and taking note.
Billions for infrastructure is obviously a boon for construction and engineering stocks, maybe even for larger economic growth and the market as a whole, at least for those with a more Keynesian outlook.
But then along came Donald Trump. His campaign pitch to spend $1-trillion on infrastructure in the United States is being taken seriously by investors.
Yet, from a Canadian perspective, Mr. Trump has diverted attention and taken away some of the spark from Justin Trudeau’s more measured plan.
“It seems like every [investment] dollar is flowing south of the border right now, chasing opportunities in the States, because they think the spending campaign by the Trump government is going to be a lot larger and probably happen a lot more quickly than Trudeau’s,” said Andrew Pink, a portfolio manager at LDIC Inc. in Toronto.
Many of the Canadian projects have already been planned by cities and provinces, and some, such as clean water and environmental initiatives, will likely start sooner. Major transit projects will take longer.
One stock to watch, Mr. Pink says, is the Montreal-based engineering company WSP Global Inc., which not only has a strong backlog of projects but also provides diverse services in other construction, energy and infrastructure areas. It also earns 25 per cent of its top-line revenue from projects in the United States.
“We really like that story,” Mr. Pink said. “The thesis is that eventually the Trudeau government will put money to work, and WSP will be there for the RFPs [requests for proposals, or bids]. They’re going to win business in Canada, but they’re also not limited to the Canadian market. So they’re also going to benefit from any kind of Trump initiative that we see.”
The construction giant Aecon Group Inc. is another obvious pick, Mr. Pink said, although the stock fell recently after it missed quarterly expectations and its chief executive officer left the company.
Still, Aecon reportedly had a record $4.5-billion in backlog contracts earlier in the year.
“They’ve gone through some changes,” Mr. Pink said, noting the management shift. But “if people are looking for value, that would be one. They will play big on infrastructure deals. They have the construction component, whereas WSP is more of a pure engineering company.”
The length of the bidding processes and slow rollout of projects across Canada will give money managers plenty of opportunity to take advantage.
“There’ll be lots of players at the table,” Mr. Pink said. Yet “we know that these companies, like in the case of WSP, have expertise that no one else has.”
Portfolio manager Hap Sneddon of CastleMoore Inc. in Oakville, Ont., foresees bumpiness in the market as professional investors look to exploit short-term fluctuations as news of projects flows in the months, if not years, ahead.
“It will be volatile, and it will come down to how companies execute on whatever slice of the pie they get. Do they have capacity? Are they going to have a problem executing on any given quarter or quarters in a row?” he said. “This is going to be a growing theme in North America, and it’ll probably happen in Europe, too.”
Whenever investors sell construction and engineering stocks and take profits, the impulse will be to look for opportunities to buy again, Mr. Sneddon says, to take advantage of inevitable upswings. For instance, he noted how his firm divested its infrastructure holdings to realize gains – or, in the case of Aecon, sold its stock when it started dipping. Yet, he indicated that the sector as a whole is still attractive.
Shares in U.S. infrastructure heavyweights such as Fluor Corp., based in Irving, Tex., and Jacobs Engineering Group Inc., based in Dallas, also should be considered. They would give Canadian investors geographic diversity as well, he said. An exchange-traded fund such as the First Trust ISE Global Engineering and Construction Index Fund also fits the bill, Mr. Sneddon said.
“When we got rid of Aecon, we said, ‘How are we going to get back into this?'” he said. “We can play it by going into the ETF, or we can go into a bunch of the players like Fluor.”
He added, “I think we’re at the first or second inning. And so you’re going to have big runups. … It’s going to have fits and starts across the board.”
But how much impact will infrastructure spending have on the larger markets, important for everyday investors who are less interested in short-term market moves than in saving for retirement?
Tom Caldwell of Caldwell Securities Ltd. in Toronto has his doubts. He characterizes Mr. Trudeau’s program as looking like the kind of stimulus budget his father, Pierre Trudeau, would have introduced.
“He could literally have taken one of his father’s budgets, dusted it off and just reused it. I’m not saying we couldn’t use infrastructure and some government stimulus. Heaven knows we’ve got infrastructure decline across the country,” he said.
Many economists believe that fiscal stimulus, such as spending on mass transit and cleaner energy, is key to creating jobs and spurring the economy. But Mr. Caldwell argued that, over all, longer-term improvement based on fiscal spending can be stifled by regulation.
Granted, he sees the construction sector likely benefiting in the near term, and pension funds are typically attracted to these kinds of investments. He also noted, however, that the performance of the loonie, especially if it falls, could be a factor.
“A lot of these infrastructure investments are currency plays,” Mr. Caldwell said. “So you want to have some of your infrastructure investments out of Canada because of the dollar.”
