The U.S. economic backdrop will likely go through profound changes in the years to come, to a large degree due to the COVID-19 experience, but also due to trends that were already in motion and were accelerated as a result. The infrastructure investment bills contemplated by the Biden Administration and the U.S. Congress will likely provide financial backing to boost this progression, but we expect private capital to supplement what looks to be a large infrastructure capital expenditure wave, owing in part to decades of underinvestment.
In addition to the obvious technology and communication advancements, industry sectors such as energy, housing, retail, and transportation were already evolving rapidly along the technology and climate-friendly spectrum. Environment, Social, Governance (ESG) initiatives effectively introduce a major influence on investors that could last for years to come, advanced by the large millennial demographic, who tend to have a higher acceptance to change, along with the Generation Z following them. The last time such a large demographic group reached their peak earnings years was also the last period of elevated and sustained economic inflation in the U.S. economy. Of course, this doesn’t guarantee a repeat of this phenomenon, but it is on the top of investors’ minds, as is the current low interest rate environment. The sweet spot might be a real asset investment that carries with it a current income component and the potential for an equity upside as these industries move forward along the technology and green spectrum.
In our view, the backbone of the U.S. economy is in energy and physical infrastructure, which drive the engine so to speak. The wildfire-related blackouts in California last year and the Texas Uri winter storm this year vividly highlighted this, while also demonstrating the need for infrastructure investment. The energy sector blurs the distinction with “tech,” as the future of the industry is proceeding towards a low-carbon emission, renewable goal that will likely require and attract billions of investment capital dollars in new technology. The industry already can lay claim to the U.S. becoming one of the few larger countries in the world to reduce carbon emissions since 2014. This has been primarily due to the transition from coal-generated base load electricity to natural gas plants with little if any give-up in cost to the ratepayers. Going forward, a further transition is evolving towards new developments in solar, wind, battery, hydrogen, and other renewable technologies. Even advanced nuclear technology may have a place as a carbon friendly but reliable baseload technology. Carbon capture may also introduce a “green” method to extend reliance on natural gas in the future.
We are optimistic that the U.S. has the right mix of public/private, regulated/non-regulated organizations to implement the transition to renewable energy over the decades to come. The investment options for this transition are many, and we believe the public markets provide an efficient, liquid avenue to participate in this generational change. The electric utility industry is an example of this. Though a portion of the public companies are highly regulated on both state and federal levels, they provide a programmatic approach to implement current and future zero carbon emission technology that maximizes the synthesis of renewable resources, primarily solar and wind, to generate electricity. The electric utility industry is embarking on this opportunity by installing new generation battery storage in what could be even more disproportionate growth. These companies are compelled by regulators, as most U.S. states have instituted renewable mandates through their regulatory bodies.