Next week, immediately after April Fools’ Day, US president Donald Trump is set to hold ‘Liberation Day’, detailing the next round of tariffs on America’s global trading parties. The level of uncertainty posed by such an erratic, far-reaching and impactful approach to global policy is causing headaches for institutional investors, not least in infrastructure.
“Investors are having to react swiftly to a geopolitical landscape that has rarely felt more volatile or unpredictable,” says Jon Phillips, CEO of the Global Infrastructure Investor Association, which represents many of the largest infrastructure investors in the world.
“Uncertainty for investors today is at perhaps the highest level in the last 80 years,” says Michael Steingold, director of private markets at Russell Investments. “You just can’t make firm decisions in this environment. Tariffs are introduced one day, removed the next, only to be brought back again a couple of weeks later. How can you operate as an infrastructure investor in that environment?”
And it is specifically Trump’s approach to trade that is front and centre. Jags Walia, head of global listed infrastructure at Van Lanschot Kempen, says: “The imposition of tariffs in the US – and the potential challenges and opportunities they may bring – are the topic dominating discussions amongst infrastructure investors.”
Despite a smattering of tit-for-tat tariffs between Canada, the US and Mexico, negotiations during Trump’s first presidency were largely successful and fruitful, resulting in a de-escalation of trade tensions between the three countries. Not so with Trump 2.0.
Alexis Crow, partner and chief economist at PwC, who specialises in geopolitics, says: “The sheer pace of escalation on tariffs with Canada and Mexico… and the heightened language around national security – and the casting of threats from America’s northern and southern borders – presents a worrisome shift with potential long-term ramifications.”
‘Nearshoring’ – bringing manufacturing closer to neighbouring countries and establishing more regional supply chains – has been an ongoing trend since COVID-19 and the subsequent rise in geopolitical and trade tensions. And Mexico has benefitted.
During Trump’s first administration, the rhetoric around tariffs on China was about bringing manufacturing back to the US. And so while there was talk of “onshoring, in practice,” says Emily Foshag, head of listed infrastructure at Principal Asset Management, “the shift was more accurately described as nearshoring”.
But that could change under Trump 2.0. “President Trump’s current administration is more focused on driving actual onshoring,” says Foshag. Crow says the casting of Mexico and Canada as threats to US “disrupts that investing and corporate allocation theme” of nearshoring.
“Some companies are shifting production to the US in order to bypass levies,” says Walia. “Should this continue, we expect US production to increase, which may create attractive investment opportunities in the US domestic energy and freight sectors. Ultimately, it is important to consider that, if tariffs drive greater US-based production, we may witness the rise of MADA – ‘Make America Domestic Again’.”
It is “too early to say nearshoring is over”, says Steingold. But, he adds, “where we candidly have been making our investments? Well, it’s not in Mexico or Canada – it’s in the US.”
That said, the growth in global trade in digital and renewable-energy equipment, will persist regardless. “The digital piece in particular is what’s growing the fastest,” Steingold says. “That will continue. And so when you have investments that facilitate that – they’re not going away, even if you have these tariffs on Canada [and] Mexico.”
Will Trump’s great onshoring gamble work? It is not a slam dunk, suggests Crow. “We’ll have to see the extent to which the promises of capital deployment will actually pan out – especially amidst the clouds of recession risk.”
Jacob Otto, debt product specialist at IFM Investors says: “Regardless of their permanence, tariffs are creating market uncertainty, which can discourage investment and increase risks around infrastructure construction, as tariffs could increase the cost of construction materials such as steel.”
This could prompt investors to favour brownfield assets. Where construction risk is present, “it will be important to ensure appropriate risk mitigants, such as large contingencies, fixed-price construction contracts and other protective measures are taken”, Otto says.
“Onshoring of manufacturing could result in a shift from importing finished goods to raw materials at ports. Successful reshoring of manufacturing could also drive higher truck, freight rail and barge transportation volumes domestically.”
The impact on Asia – and shipping ports
Being tough on China in the realms of trade, technology and national security is a clear bipartisan issue in the US and has been a feature of its foreign policy since the first Trump administration. In this context, Foshag sees recent China tariff developments as “more modest relative to a worst-case scenario”. She adds: “The impacts of new tariffs on Chinese goods have the potential to be less disruptive than for other trading partners as relevant supply-chain shifts have already been occurring.”
The US now accounts for only 16% of Chinese exports, and rising intra-Asia demand and trade may partially offset expected economic weakness in China. Further, the rebalancing of supply chains continues to benefit countries like India, Thailand, Indonesia, Malaysia and Vietnam. “The Chinese government is increasingly focused on strengthening domestic consumption and, accordingly, we prefer infrastructure businesses in China that are domestically oriented,” Foshag says.
“China and other Asian countries might actually rank as winners,” according to Crow. “We’ve already witnessed the extent to which China’s neighbours benefitted from the trade diversion resulting from the China-plus-one strategy” – where businesses invest in neighbouring countries to avoid being singularly exposed to China. Diverted foreign direct investment and human capital from mainland China and Hong Kong to Southeast Asian countries, India and Japan “have richly benefited countries, companies and investors”, she says.
Crow argues that China is “well poised to navigate Trump 2.0”. The country has used the intervening years to strengthen its trade ties with neighbouring countries such as Malaysia and Thailand as well as other economies such as Saudi Arabia and Brazil. “America’s trade distortions can do little to disrupt these bonds and, on the contrary, might strengthen it.”
Walia also notes those strengthening Chinese relationships with other countries such as Brazil are “creating new opportunities for investors in the freight and port sectors of both countries”. He says: “The expansion of farming subsidies in China may lead to attractive opportunities within its domestic transport sector.”
Not all of the effects of the China-US rivalry are positive for Asia. Foshag expects “a potentially more challenging environment for the global shipping sector” and Principal is “limiting exposure to Asian port operators on the view that port operators may enjoy less pricing power than they have in recent years”.
Trump has previously talked of his desire to seize the Panama Canal and at the beginning of March US investment giant BlackRock led the takeover of ports at the canal. BlackRock declined to comment on its motivation or source of funds. One source said off the record that they were surprised by the speed of the deal and that “a lot of things about it suggests a political motivation”.
The ownership of ports across the globe appears “increasingly to be becoming an element in a great strategic game being played by the two superpowers”, the source says. “Chinese shipping companies are huge owners of port facilities. I don’t think that’s going away any time soon.”
Are shipping ports still an investment opportunity today? Steingold says: “It’s just hard for us to see how you’d get comfortable with underwriting growth in seaports, because that’s all merchandise trade – and volumes just don’t appear to us to be accelerating anytime soon.”
He adds: “Investors in seaports today are investing with the view that merchandise trade has flatlined and is not going to be growing at the rate of real GDP going forward. There are certain growth opportunities – for example, North-South trade is interesting. We see opportunities in some seaports in certain emerging and frontier markets that are not located in Latin America or Southeast Asia. But in general, this is not a high-growth area.”
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