Reflections on Trends Likely to Accelerate
With a President-elect declared in the US I thought it was appropriate to reflect on four tends that are likely to strengthen or accelerate. This is not to suggest that this acceleration is the result of a change in leadership but there is undoubtedly some element of contribution. On the US political front, I would expect a tumultuous couple of months.
Trend #1 Infrastructure
The pandemic and associated economic crisis have caused state and federal governments to spend at levels not previously seen. The associated deficits can only be addressed through higher taxes, inflation, or asset sales. The later in effect is the continued privatization of government owned assets. Currently the Fed has signaled near zero interest rates for some number of years, effectively taking broad based inflation off the table. Higher taxes will be significantly constrained if the Senate remains in Republican hands. This brings us to the sale of government owned assets, a.k.a. infrastructure.
Before looking a little closer at infrastructure privatization, it is necessary to address the impact of any infrastructure stimulus. Additional federal dollars in this direction act to further increase the burgeoning federal deficit and put added pressure on selling assets. The federal government is not an owner of roads and bridges and airports as those are largely state and locally owned so what the federal government can do will be limited, in the medium term if not in the short term. Any intelligent federal action on infrastructure stimulus should include “language” that gives the states more flexibility and this is important as the pandemic has punched huge holes in state and local infrastructure funding mechanisms. Let’s turn to the states (and locals).
State infrastructure budget holes can likely only be partially filled by any federal stimulus and are more likely to return planned expenditures to pre-pandemic levels at the best. This is not enough at the state level since budget holes in the largest urbanized states go well beyond infrastructure funding holes. They need to plug those holes and they will be the ones selling assets. There was already a trend towards PPPs and that will be accelerated now. In addition, look for the sales of existing assets to the private sector.
Opportunities exist in this structural change including potential new roles.
Trend #2 Dramatic energy transition
Pre-pandemic the traditional fossil fuel industry was already under growing pressures. The volume drops as a result of reduced economic activity accelerated already mounting pressures here. At the same time costs on renewables, especially wind and “net zero” buildings, have become competitive with the depressed fossil fuel prices. This competitiveness will likely temper any sharp fossil fuel price increases except under supply dislocations. Concomitantly there has been a renewed interest in the “hydrogen/ammonia cycle” as a way to store energy generated by renewables.
This dramatic energy transition received a boost as ESG issues received increased focus due to the pandemic. The outcome of the presidential election in the US will likely further add to this already underway acceleration.
Trend #3 Data anywhere, anytime
The remote working environment accelerated by the pandemic will drive many fundamental changes in how businesses and even whole industries will be configured in the near future. But one enabler of this will be access to data anywhere, anytime. Cloud environments will provide increased cybersecurity options as well as ready platforms for software as a service. One physical effect of this will be more data centers as well as more emphasis on universal broadband coverage. Expect any compromise infrastructure stimulus to include provisions for rural broadband. Large swaths of the US do not have reliable high-speed broadband access. Already an accelerating market, data centers will grow even faster.
Trend #4 Scale matters
All industries at all levels will have relative winners and losers. The losers will be consolidated, same as in any market shakeout. Expect consolidations in client sets and competitors. Also expect to see some elements of vertical integration in industries as supply chains are reconfigured and large enterprises seek ways to create competitive advantage.
