Maxwell Gold

Director of Investment Strategy

ETF Securities Outlook

September 2016

Americas Infrastructure Frustrations

Summary

Market and political factors are currently favorable to support

additional US infrastructure investment

Table 1: Investment gap in American Infrastructure

Due to continued budget deficits, private capital will most

likely need to supplement public infrastructure spending

Roads/Bridges/Transit

Renewed investment in US infrastructure may be tailwind to

drive US growth and commodity demand

America is showing its age

Billions (USD)

Total
Needs

Estimated
Funding

Funding
Gap

$1,723

$877

$846

Energy (Electricity)

$736

$629

$107

Airports

$134

$95

$39

Dams/Waterways /Ports

$131

$28

$103

Rail

$100

$89

$11

Other

$811

$306

$505

US infrastructure is in dire need of an upgrade. Many of the

countrys aging assets such as roads, bridges, airports, waterways,
and mass transit continue to deteriorate due to lack of new
investment.

Total

$3,635

$2,024

$1,611

$454

$253

$201

In 2013, the American Society of Civil Engineers (ASCE) conducted

their Report Card for Americas Infrastructure and assigned a grade
of D+ (defined as poor) to the current US national infrastructure.
Based on their findings, they estimated that an additional $200
billion increase in annual spending would be needed simply to raise
the grade to mediocre.

There have been recent signs of changing attitude in US fiscal

spending towards its deteriorating infrastructure. In December
2015, the Fixing Americas Surface Transportation (FAST) Act was
passed and allocated $305 billion over the next five years for
highway and transportation 1. This, however, is only a small step in
the right direction as the projected cost, funding gap is estimated at
over $1.6 trillion across all segments (see Table 1).

This is partly a result of three decades of underinvestment with a

23% drop in real capital spending from 2003 to 2014 across the two
largest infrastructure categories: transportation and water. This
occurred at a time when overall federal infrastructure spending has
remained fairly steady at 2.5% of annual GDP since 1956, but
trending lower in recent years (see Exhibit 1).
Exhibit 1: Public capital spending on US transportation
and water infrastructure
Share of Gross Domestic Product (lhs)
Total Capital Spending (rhs)

250

Share of GDP (%)

3.5

200

3.0
2.5

150

2.0
100

1.5
1.0

Billions ($US)

4.0

50

0.5

1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013

0.0

Source Congressional Budget Office, ETF Securities. Exhibit data from 1/1/1956 to
12/31/2014.

Annual Investment

Source: American Society of Civil Engineers 2013 Report Card for American
Infrastructure. Other = public parks & recreation, schools, water & wastewater,
hazardous & solid waste, ETF Securities. Table data as of 6/30/2015.

Pricing and populism bode well for US public

works spending
The present economic and political climate is primed for increased
US fiscal spending on infrastructure. The current interest rate
environment remains near record lows as Federal Reserve (Fed)
and global monetary policy remains accommodative. Low interest
rates means that borrowing and financing costs are currently low.
Additionally, since rates are expected to remain lower for longer
this may extend the window of opportunity for policymakers to
enact further spending on infrastructure projects.
Simultaneously, commodity prices remain well below their average
prices in 2003 (during the start of the recent commodity bull
market) which saw the beginning of a marked decline in US real
capital spending. The reduced costs across key building and
construction materials such as steel, copper, cement, and concrete
presents an attractive opportunity for the US to enter into projects
to rebuild its infrastructure. Energy and oil prices also remain
suppressed and given the current global supply glut can be
expected to remain less of a headwind for infrastructure which not

1 U.S. Department of Transportation Federal Highway Administration

Past performance is no guarantee of future results.

Exhibit 2: Dry powder in global private capital may serve

as growing source of infrastructure financing
$1,600

US State & Local Gov't Budget Funding Status

5%

$1,200

0%

$1,000

-5%

$800

-10%

$600

-15%

$400

2015

2013

2014

2011

2012

2010

2009

2007

2008

2005

2006

2003

-25%

2004

$-

2001

-20%

2002

$200

2000

Billions, USD

$1,400

10%

Percent Surplus/Deficit

Global Private Capital Dry Powder (lhs)

Source: Preqin, NIPA, ETF Securities. Exhibit data from 01/01/00 to 6/30/2015.

In order to avoid spending cuts on future infrastructure

investments, local governments may find supplemental funding in
the form of public-private partnerships and direct private
investment. Against the backdrop of stretched equity valuations,
record low interest rates, and negative real yields on cash private
investment may find attractive returns in infrastructure deals.
Nearly half of projected funding gap in US infrastructure is tied to

US Economic Output Gap (lhs)

US Labor Force Participation (rhs)

68%

66%

1
0

65%

-1

64%

-2

63%

-3

62%

-4

2015

2011

2013

2007

2009

2005

2001

2003

1997

60%

1999

-6

1995

61%

1991

-5

Participation Rate

67%

1993

There appears to be a greater commitment from federal spending

to offset the multi-decade decline, but historically state and local
governments have carried the majority of financing for public
projects. As of 2014, state and local governments accounted for
nearly 75% of total public infrastructure spending, but this burden
may be difficult to sustain in the years ahead. US state and local
budget deficits remain in double digits, and given the continued
weak economic recovery raising tax revenue to combat these
shortfalls is a politically unpalatable option (see Exhibit 2).

Exhibit 2: Infrastructure could improve US output gap

and labor participation

1987

Funding the future

Public infrastructure spending is vital to boosting the US economy,

particularly when the impact of monetary stimulus appears to have
diminishing returns. Increased public projects would see a rise in
US import and demand for copper, steel, cement, aluminum,
petroleum and other cyclical commodities. This would also provide
a boon to the US manufacturing, materials, and construction
sectors which have slowed of late.

1989

Utilizing the growing populist sentiment, politicians appear very

keen to increase employment, US competitiveness, and economic
growth in manufacturing and construction related sectors. With
mass public support and growing populist sentiment, the current
climate may help expedite fresh investment into US infrastructure
which has hit political hurdles in the past.

Infrastructure can reignite US economy

1985

The growing rise of populism in global politics is also increasing

public support for economic growth through infrastructure
investment. In this years US Presidential election the only topic
both party candidates seem to agree on is the need to increase fiscal
spending on Americas deteriorating infrastructure. Hillary Clinton,
the Democratic Party candidate, has outlined a plan to increase
federal infrastructure funding by $275 billion over a five-year
period with $ 250 billion to direct public investment and leveraging
$25 billion through to fund up to $225 billion direct loans, for a
total spending increase of $500 billion. Donald Trump, the
Republican Party candidate, has expressed similar intentions to
drastically increase federal spending on infrastructure.

bridges, roads, and transit all of which operate on tolls and income.
This potential cash flow would be an attractive option for many
yield hungry institutional funds and investors, particularly
endowments and pensions, which have long time horizons
matching the tenor of infrastructure investments. Further private
investment is expected to rise in the near term since 66% of USbased infrastructure investors are currently below their target
allocation to the asset class 2.

Output Gap Level

only uses oil for fuel in machinery and vehicles but for petroleum
products such asphalt for fixing highways and roads.

Source: OECD, US Bureau of Labor Statistics, ETF Securities. Exhibit data from
12/31/85 to 12/31/15.

Additionally, the US labor market could benefit by not only

improving the labor participation rate - which has been in
structural decline for several decades - but also by creating new
low-skill jobs, which have become scarce due to automation and
globalization. With more infrastructure activity and higher labor
participation translating into GDP growth, this could further help
close the USs current negative output gap.
After years of reduced investment, the current economic and
political backdrop has reached a confluence that is supportive of a
boost in US infrastructure spending. This should prove a boon for
US growth which has remained sluggish in recent quarters and
remains below its long term potential growth. Additionally, US
labor markets and materials sectors may benefit from an expected
increase in public spending.

Preqin Special Report: US Infrastructure. May 2016

Past performance is no guarantee of future results.

Important Information
Definitions: The Federal Reserve (Fed) is the central banking system of the United States of America and the Federal Open Market Committee (FOMC) is a
committee within the Fed charged under the United States law with overseeing the nation's open market operations. The European Union (EU) is a politicoeconomic union of 28 member states that are located primarily in Europe. The U.S. Commodity Futures Trading Commission (CFTC) is an independent
agency of the US government that regulates futures and option markets. Gross domestic product (GDP) is the monetary value of all the finished goods and
services produced within a country's borders in a specific time period. The International Monetary Fund (IMF) is an international organization created for
the purpose of standardizing global financial relations and exchange rates. The World Bank is an international organization dedicated to providing financing,
advice and research to developing nations to aid their economic advancement. Brexit is an abbreviation for "British exit," which refers to the June 23, 2016,
referendum whereby British citizens voted to exit the European Union. Year over year = the percent change over a full calendar year.

Maxwell Gold is a registered representative of ALPS Distributors, Inc.

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