2020 Foresight – Part 4: A U.S Presidential Election Blog Series from TDAMPublished: 27/10/2020
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In last week's blog, the Fixed Income Team provided their insights on how the bond markets may react to the various possible outcomes of the election. In today's blog, the Alternative Investments team at TDAM provided their thoughts on the potential impact the election result may have on the Alternative investing space.
A focus on Infrastructure
In looking at the potential impact of the US election on our alternative investment platform, the focus will be on infrastructure, and in particular, on renewable energy. Currently, the TD Greystone Infrastructure Fund is well positioned as its U.S investments are predominantly in renewable energy (solar power) with exposure to transportation as well.
An important point to note is that regardless of the outcome of the election, it is not expected to result in a negative effect for the infrastructure spending. Infrastructure such as transportation (roads, ports and airports), power, water and even digital infrastructure underpin an economy, providing essential services and at its core provides what businesses and people need to live. The U.S is the largest infrastructure market in the world and has considerable needs to replace existing infrastructure and invest in new infrastructure, regardless of the outcome of this election.
Infrastructure spending will continue - regardless of the election outcome
Under the different possible election scenarios, we believe that infrastructure spending will have to continue increasing to help support an ever-growing economy; with the main difference being that Biden's platform includes a greater focus on green infrastructure and renewable energy which would benefit environmental sustainability. Under Biden, we could see more incentives and accelerated growth in renewable energy projects if he can get the support of the senate. While Biden's platform is tilted to renewables, investment in renewable energy hasn't stopped under the Trump's administration as the U.S. continues to be one of the largest renewable energy markets in the world. However, Trump will likely continue to favour support for conventional energy supplies.
Using a long-term lens
As long-term investors, our strategy is to focus on owning multi-generational portfolios of institutional quality assets. Given the nature of our investments – both in size of capital outlay and complexity - short term tactical decisions are not part of our process. We believe that having a well-diversified portfolio is key to weathering storms and comfortably navigating different economic scenarios.
As we've seen during the COVID-19 pandemic, all infrastructure assets are not created equal. As an example, assets that are highly correlated to the economy, like aviation and toll roads, have seen their revenue impacted as people travel less during these unprecedented times. On the other hand, assets that are focused on providing essential services, like renewables and energy generation, have seen better revenue stability during the pandemic. These types of assets with contracted revenue streams represent approximately 93% of our strategy. This has clearly shown that portfolio construction is key to remaining resilient when faced with uncertainty and we continue to be very mindful of this when building out our infrastructure platform.
While the programs of both Biden and Trump have some emphasis on infrastructure spending, whoever wins will inevitably inherit an economy with higher debt levels than we've seen in quite some time. Consequently, this may provide an opportunity for institutional investors who have the experience and capital to invest, as governments may be constrained with tight budgets, and seek to sell infrastructure assets to raise funds. Additionally, the U.S. Federal Reserve Board recently amended its strategy to focus on stimulating inflation and more importantly, suggested that they may be comfortable overshooting their inflation target. Real asset investments such as real estate and infrastructure are well positioned for an inflationary environment as cash flows from these assets (lease agreements, power agreements) typically have an inflation adjustment. We continue to view alternative assets favorably within the strategic asset mix of portfolios due to their yield and relatively stable income resiliency.
We hope you enjoyed the 4-part blog series on the 2020 U.S Presidential Election and encourage you to periodically check out the TDAM Views Blog in the coming weeks for more informative blogs.
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