Global X’s Alec Lucas on Investment Opportunities in Infrastructure and Reshoring

Alec Lucas, Research Analyst at Global X ETFs, joins Opto Sessions to discuss climate change and the importance of clean tech in meeting global climate change goals. He also discusses federal efforts to drive investment in infrastructure and the impact of reshoring.

LISTEN TO THE INTERVIEW:

Apple Podcasts

Spotify

Alec Lucas, Research Analyst at Global X ETFs, covers ETFs in the firm’s ‘thematic growth suite’, with a focus on the ‘physical environment’ and ‘people and demographics’ categories.

Before joining Global X, Lucas interned as an equity research analyst at Nicusa Investment Advisors. He has a Masters in sustainability management from the Colombia University School of Professional Studies and earned his bachelor’s degree in finance and value investing from Fordham University in New York.

To harness the potential of opportunities within specific themes, Global X identifies disruptive trends that it believes will reshape traditional industries and segments. These trends can encompass areas like demographics, climate change and technological innovation. The company is particularly interested in one-time paradigm shifts that will permanently alter the status quo once they gain widespread adoption.

For the infrastructure theme, the Global X approach involves three key pillars: conviction, or a high degree of confidence that these disruptive themes will come to fruition; investibility, with publicly traded companies offering pure-play exposure; and timeframe, with a focus on themes with a long-term investment horizon.

Climate change

One of the most important issues facing the global community is climate change. July was the hottest month on record, while 2023 had the hottest September in the 174 years since record-keeping began. July also saw the world exceed the threshold set by the Intergovernmental Panel on Climate Change, as temperatures topped 1.5 degrees Celsius above pre-industrial averages.

These trends underscore the importance of technology in battling the climate crisis, as well as the opportunity embedded within climate change as a megatrend. Improvements in the underlying technologies, accommodative government policies and the strengthening of supply chains have helped many of these technologies come a long way. “But if we look across the clean tech space, the overwhelming opinion is that a lot of these technologies need to be adopted quicker to actually keep us below that threshold and allow us to reach net zero emissions by 2050,” Lucas says. Some technologies, such as electric vehicles (EVs) and solar photovoltaic (PV) systems, are on track to help the world meet that target.

Solar energy, in particular, is critical to reducing greenhouse gases, and the technology behind it received a boost in August 2022 when the Federal Tax Credit for Solar PVs, also known as the Investment Tax Credit (ITC), was signed into law. The credit was embedded in the Inflation Reduction Act (IRA), the largest-ever climate investment in US history, designed to mobilise capital to achieve the country’s climate goals.

“The overwhelming opinion is that a lot of these technologies need to be adopted quicker to actually keep us below that threshold and allow us to reach net zero emissions by 2050.”

According to Lucas, the legislation was a “game changer” in the effort to stem climate change, providing $370bn in climate-related tax credits and incentives. Solar manufacturing has accounted for the majority of spending in the clean tech space because it is cost-competitive and easy to install.

Investment-focused Regulatory Framework

Several regulatory measures implemented in recent years have created substantial tailwinds for the infrastructure theme and incentivised spending in the sector. In addition to the IRA, the Jumpstart Our Business Start-ups (JOBS) Act, passed in 2012 to encourage funding to small businesses, and the CHIPS and Science Act passed concurrently with the IRA, have been key, says Lucas.

The IRA increased investment opportunities in infrastructure, providing “all these credits and incentives to not only build our renewable energy production capacity, which is capital intensive but also our manufacturing capacity”, Lucas notes. The legislation aims to “build out supply chains for these disruptive technologies like renewables, EVs and batteries. These require huge industrial complexes, and we simply need companies to come in.” While it may not be as direct an investment as the JOBS Act, “there are powerful indirect benefits” stemming from the IRA.

The JOBS Act included $550bn in new spending. For comparison, the last major federal investment in infrastructure was in the American Reinvestment and Recovery Act in 2009, says Lucas, which directed $50bn to the Department of Transportation to stimulate construction demand. Of the $550bn in new spending, $280bn is already available at the state level and is being directed towards 38,000 projects. “The best news for construction companies and companies in the space is that it is likely a small subset of what is to come from the bill,” he says.

The CHIPS and Science Act, for its part, supports the IRA’s goals of bringing manufacturing home by investing $50bn to expand semiconductor manufacturing in the US.

Reshoring Drive

These laws reflect a more extensive trend of reshoring manufacturing and supply chains, one that became especially prominent following the onset of the Covid-19 pandemic in February 2020. “The pandemic exposed vulnerabilities in globalised supply chains, prompting companies in the US and around the world to rethink how their supply chains are oriented,” Lucas says.

“The pandemic exposed vulnerabilities in globalised supply chains.”

This proved to be more than a talking point for shareholders, with many reshoring projects moving from the planning stages to execution. “That’s reflected in construction starts and spending on US manufacturing capacity, which has outpaced other segments of the industry. It’s grown approximately 2.5 times since the beginning of the pandemic,” Lucas notes. The trend was further accentuated by Russia’s invasion of Ukraine, which revealed additional vulnerabilities in global supply chains.

“Federal funding provides enough of a discount on these projects that they’re able to move forward,” he says, pointing out that since the passage of the IRA and the CHIPS and Science Act in August 2022, more than $480bn in private investment has poured into the US, with a significant focus on manufacturing in segments such as EVs, renewables and semiconductors. “They are very much part of a longer-term trend, but these bills have added momentum.”

“They are very much part of a longer-term trend, but these bills have added momentum."

Future Investment Opportunities

Recently passed legislation is not enough to meet US infrastructure needs: the country had an infrastructure investment gap of $2.6trn as of 2021, according to the American Society of Civil Engineers, underscoring the importance of further investment. 

When looking at the overall infrastructure theme, Global X has identified four sub-themes across the value chain that are best positioned to benefit from these developments — all of which it has aimed to represent in the Global X US Infrastructure Development ETF [PAVE]: raw materials production, construction, engineering, and ‘heavy equipment’. The fund is up 8.8% year-to-date.

Listen to the full interview and explore our past episodes on Opto Sessions. You can also check out all our episodes via our YouTube Channel.