While governments have been trying to do the heavy lifting towards meeting the growing demand for essential infrastructure, it may be opportune for the asset class to step into the spotlight.
Last year, global listed infrastructure underperformed both global equities (24 per cent) and global bonds (6 per cent), delivering a modest 2 per cent.
Valuations faced challenges amid rising interest rates and a prevailing “higher-for-longer” narrative from central banks.
Amid these dynamics, specific sectors within the asset class emerged as winners, notably transportation infrastructure like airports and toll roads, which thrived due to rising passenger volumes. The energy sector also experienced gains, driven by geopolitical tensions. Conversely, utilities faced setbacks, with telecom towers feeling the impact of operators’ reduced capacity to transfer the costs associated with higher interest rates.
In its latest outlook, First Sentier Investors (FSI) suggested that 2024 looks to be the year when global listed infrastructure is positioned to achieve outperformance.
FSI emphasises the effective inflation pass-through supporting earnings in the asset class, with many companies currently trading at levels unseen since the Global Financial Crisis (GFC).
In the coming years, FSI foresees an appealing combination of inflation-linked income, with a yield ranging between 3 per cent and 4 per cent, coupled with structural growth, anticipating earnings growth in the range of 6 per cent to 7 per cent, making the asset class particularly attractive.
Meanwhile, this year, listed infrastructure could act as a defensive diversification tool in an environment marred by operating expenditure inflation and slower economic growth.
“In our view, infrastructure provides a significant and cheap diversifier within a portfolio,” the firm said.
The investment manager also noted that the recent period of global listed infrastructure underperformance is not unprecedented, given infrastructure returns were adversely affected by a rise in real bond yields in 2018, but bounced back against falling rates.
“Infrastructure capital expenditure growth is likely to gain momentum in 2024, even in the face of a higher cost of capital environment. We anticipate that corporations will increase equity raisings while reducing buybacks to fund this acceleration in capital expenditure. This strategic shift should lead to greater investment in growth opportunities,” it said.
It also forecast a rise in mergers and acquisitions as private market funds buy discounted listed infrastructure assets and as listed infrastructure companies sell non-core assets to fund higher growth capital investment needs.
“This could lead to consolidation and increased competitiveness within industries,” FSI said.
Structural drivers leading to growth
Addressing structural drivers which could lead to growth in the asset class, Sarah Lau, portfolio manager at Resolution Capital, said “demand for essential infrastructure is growing rapidly”.
“McKinsey estimates the needed annual spend to keep up with this is over $3.5 trillion,” she said at a recent event in Sydney.
Ms Lau highlighted that while sophisticated investors raised a substantial $175 billion in 2022 for investments in private unlisted infrastructure, governments continue to play a predominant role with G20 governments allocating $1 trillion in their 2022 budgets for investments in these assets.
“At a time when government balance sheets are very stretched and the economy’s needs are rapidly shifting, for example, we need to be more connected, more decarbonised, have more recycling of waste, and even more clean water – we believe that this infrastructure investment gap is a compelling opportunity for investors and the listed market is an ideal liquid way to access profitable opportunities in this thematic,” Ms Lau said.
She outlined that infrastructure assets like airports, mobile network towers, and utilities have been able to deliver resilient returns due to their monopolistic nature, with high barriers to entry and strong pricing power.
Ms Lau observed: “[And] these are physical assets that are critical to society functioning, so demand is very resilient.”
Sarah Shaw, global portfolio manager and CIO of 4D Infrastructure, agreed that a number of long-term trends will outweigh short-term trends for the asset class, including global population growth, the energy transition, and development market replacement spend.
“Many developed nations need to replace old and inefficient infrastructure. Separately, robust global population growth in emerging nations is forcing up infrastructure spending,” Ms Shaw said.
“The emergence of middle classes too in developing economies like India and Latin America offers a huge opportunity with infrastructure, both as a driver and a first beneficiary of improved living standards.”
Regarding the energy transition, she believes there remains a “multi-decade” investment opportunity for infrastructure despite a seemingly unclear path towards decarbonisation among various countries.
The rise of technology, she added, is another tailwind for increased investments in infrastructure.
“The explosive growth in data consumption is fuelling significant investment opportunities for infrastructure owners globally. Artificial intelligence and cloud computing, for example, demand huge infrastructure investment to support their growth.”
