Threadneedle: Heathrow Runway Won't Boost the Economy

Plans to build a new runway at Heathrow runway have been met with opposition, including from Threadneedle who think new roads would be a more effective boost to GDP

Karen Kwok 27 October, 2016 | 4:29PM
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The UK Government this week decided to build a new runway at Heathrow to expand the UK’s air travel capacity. The decision will bring benefits to the wider economy worth up to £61 billion over 60 years, according to a statement from the Government.

The construction of a third runway at Heathrow will secure jobs and business opportunities for a next decade and beyond, said Transport Secretary Chris Grayling.

“Heathrow already handles more freight by value than all other UK airports combined, accounting for 31% of the UK’s non-EU trade, and its expansion will create even more opportunities for UK business to get their goods to new markets,” said Grayling.

The statement also stated that up to 77,000 additional local jobs will be created by 2030, as well as lower fares and fewer delays to passengers flying to Asia and South America.

While the Government has promised the expansion of Heathrow will benefit the whole country, the decision has triggered some opposition. The Conservative MP for Richmond Park & North Kingston Zac Goldsmith resigned his parliamentary seat in protest of the decision.

“The cost of this project will largely fall to the taxpayer. Heathrow is already the most expensive airport in the world. The surface transport costs alone- to accommodate the extra traffic- will be up to £20 billion, which we will have to pay for,” Goldsmith said in his resignation letter.

“The sheer complexity, cost and legal difficulties mean it is unlikely ever to happen.”

The Foreign Secretary Boris Johnson also expressed his doubts on the expansion project, saying that “it is very likely the runway will never be built”. The expansion plan is estimated to cost £16.5 billion. 

And now, Mark Burgess, chief investment officer at Columbia Threadneedle Investments has also questioned whether Heathrow expansion is the right project for to effectively boost the UK economy.

His colleague Richard Colwell, head of UK equities added that the Government should instead be investing directly in road and rail developments which will benefit the UK economy over the long term.

“The UK is lagging behind global peers in terms of infrastructure spend,” said Colwell. “We have roads to build.”

According to figures provided by Columbia Threadneedle, infrastructure investment has on average occupied around 0.6% of UK GDP over the last two decades, lagging behind peers in the developed world. Road investment in the UK has fallen from 1990s levels and rail investment has not risen despite huge growth in passengers.

Chris Kinder, co-manager of Threadneedle UK Absolute Alpha agreed, adding that the whole supply chain will be benefit from a possible increase in infrastructure spend due to be announced in the Autumn Statement.

In terms of specific stocks, Kinder holds a large large position in Kier Group (KIE), which is a contracting company building roads. He also likes WS Atkins (ATK), a consultancy company that provides advice and planning for the Government. He believes these companies are in a good position to be benefited by infrastructure investment.

However, Kinder also has concerns that the November Autumn Statement due to be delivered by Chancellor Philip Hammond next month will come as a disappointment to investors, stating that expectations are too high.

“We don’t know anything about Hammond. We know the previous government was pro-businesses, but we don’t know whether Hammond will go to that direction,” said Kinder.

“I think it’s really tough to answer. The two Governments are different. The new Prime Minister has been very clear that this is a different regime.”

Housebuilder Stocks are ‘Outrageously Cheap’

Kinder also thinks that housebuilders stock look ‘outrageously cheap’ after the fall in share prices following the Brexit vote in June.

“I have been adding housebuilder stocks and I am looking to add more. Housing prices remain elevated in our view, but I will skew my portfolio away from London where the biggest risks of a correction are,” Kinder said.

Colwell added Brexit could inversely generate a long period of growth thanks to the depreciation of the pound. “The British economy, especially domestic consumption, is very strong and the fall of the pound to 2013 levels is just what the country needs to generate some inflation,” he said.

Both believe that the UK is not alone in facing economic and political headwinds globally, and the valuations of stocks exposed to the UK domestic economy look relatively attractive. They think international investors should not steer clear of these buying opportunities, even with reduced growth expectations.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk