Infrastructure has characteristics which support long-term visible and resilient earnings streams, which should prove attractive relative to broader equities in uncertain economic and geopolitical environments, but its positioning at the crossroad of global trade makes it susceptible to broader threats, Sarah Shaw from 4D Infrastructure said.
“Infrastructure stands at the crossroad of global trade – ports allow for the movements of goods across the seas, while goods are moved from ports to demand centres by railway and road infrastructure,” the global portfolio manager and chief investment officer said.
“Tariffs also have a potential impact on countries’ growth and inflation outlook, which impacts the macroeconomic variables driving infrastructure’s long-term return outlook.”
She explained that Trump’s Liberation Day announcements were detrimental to “pretty much every segment of the market”, including infrastructure, with few absolute winners within the asset class.
“On a relative basis, we expected infrastructure to be more resilient but the economic consequences would have been felt,” Shaw said.
“Thankfully, by implementing a 90-day pause and indicating a willingness to negotiate directly with countries, it would appear Trump has stepped back from the most extreme action, increasing the likelihood of our base case eventuating, a clear improvement on the Liberation Day worst-case outcome.”
Shaw’s base case expects moderate economic damage with ongoing tariff volatility and selective carve-outs, while her bear case foresees severe global disruption, a US recession, surging inflation and a collapse in US–China trade.
Breaking down the asset class performance under both scenarios, Shaw noted that the APAC region’s midstream segment remains relatively insulated from broader economic disruptions.
Her analysis shows that while rail in the APAC is expected to perform fairly well under the base case, it is predicted to be fairly exposed if things shift and the bear case becomes reality.
Looking over at the US, Shaw said rail would bear the brunt of the impact – with intermodal the most directly linked to trade and weaker domestic consumption – while renewables are expected to suffer as a result of offshore supply chains and uncertainty over IRA repeals.
Moreover, she noted that while utilities would be impacted by some pullback in growth expectations, generally they should have resilient earnings even in recessions.
Shaw, however, warned that “the Fed quandary of cuts versus hikes, and the steepening of the yield curve, puts utilities and renewables most at risk”.
Turning to China, she noted ports are expected to succumb to the heaviest impact, particularly as related to the ASEAN relationship, while airports could be impacted by an international spending slowdown.
“The level of fiscal support should offset some impact on overall GDP sensitive sectors, such as toll roads, while electric and gas utilities with the highest industrial exposure will feel the greatest impact,” Shaw said.
Europe in general is predicted to be impacted to a lesser extent, with the internationally exposed businesses hit most but still relatively better off than the US and China. Moreover, according to Shaw’s analysis, Europe could benefit from a reallocation of trade.
“It should also be noted that we believe a negative infrastructure outlook should still be relatively better than many sectors in the market, where earnings are not underpinned by the key characteristics that makes infrastructure resilient – monopolistic, contracted or regulated, inflation hedged,” Shaw added.
Currently, 4D Infrastructure is overweight Europe and parts of Latin America and has an “increased appreciation of defensive sectors with strong yields”.
