A new report by IFM Investors has concluded that infrastructure assets are demonstrating significant resilience amid heightened levels of global economic uncertainty.
According to IFM, the asset class’ favourable links with inflation and steady underlying demand are creating a supportive environment for infrastructure equity and debt investment.
“The global economic environment is a difficult one for investors, but we believe the infrastructure asset class has the characteristics to provide resilience in the face of rising inflation, higher interest rates, softening growth, and continuing geopolitical and economic uncertainty,” commented IFM Investors global head of infrastructure Kyle Mangini.
IFM acknowledged that infrastructure would not be immune to the challenges arising from the more difficult macroeconomic environment. However, the global fund manager said that resilience was expected to continue across a number of key sectors moving forward.
It suggested that both price inflation and economic growth can provide infrastructure assets with a “natural hedge” against the adverse impacts of rising interest rates.
In terms of specific opportunities for investors in the infrastructure space, IFM noted that Russia’s invasion of Ukraine has resulted in renewed attention on energy security, which it said would likely accelerate the energy transition over the longer term.
“The infrastructure equity and debt sectors will also benefit from tailwinds from the energy transition as governments get on with the significant task of building out the infrastructure their communities need for 2030, 2050, and beyond,” said Mr Mangini.
IFM also drew attention to the increasing importance of social factors, particularly inclusion and diversity as well as worker safety, which it said could impact investment decision making.
“We also believe social factors will attract increasing attention as investors become more attuned to the social issues and challenges that need to be addressed in order to meet our environmental goals,” Mr Mangini added.
IFM noted that allocations to externally managed infrastructure by institutional investors have grown from US$300 billion in 2016 to more than US$700 billion in 2021, which it said has solidified infrastructure’s role as a foundation portfolio asset class.
However, the global fund manager also determined that global pension funds and other institutional investors remain underweight infrastructure relative to their long-term targets.
In an analysis piece for InvestorDaily late last year, ClearBridge Investments portfolio manager Charles Hamieh stated that infrastructure’s long-term proposition was looking more attractive, in particular due to its power as an inflation hedge.
“Broadly, infrastructure can adjust to inflationary environments due to the pre-programmed way it builds inflation into regulation and contracts,” he wrote.
“This applies to both regulated utilities, which adjust their allowed returns with regulators to account for inflationary cost increases, and user-pays assets, such as toll roads or rail, as both types of infrastructure generate inflation-linked revenues.
“As a result, dividend yields are attractive and, in our portfolios, have grown above inflation, closely tracking the asset growth of the underlying companies.”
Mr Hamieh also indicated that several areas of infrastructure were benefiting from decarbonisation-related tailwinds.
