Investor sentiment was rocked by valuation concerns for artificial intelligence (AI) last week following a US$500 billion (A$770 billion) wipeout of top technology companies on Tuesday 4 November.
And it didn’t end there with losses continuing for many tech holdings throughout the week as Nvidia fell more than 2 per cent on Thursday - extending its five-day losing streak to nearly 8 per cent.
Fears of an AI bubble being driven by the substantial capital expenditure (capex) flowing into the sector have persisted for some time, with some asserting that these worries are finally coming to a head.
However, while capex supercycles typically have a negative impact on global equities, Mark Jones, Resolution Capital's global listed infrastructure (GLI) portfolio manager, has argued that infrastructure is uniquely positioned to emerge unscathed.
“We don't know who is going to be the winner [of the AI boom] - Microsoft, Google - we don't know,
“In infrastructure, it's the opposite. If you're building a new power station that's going to be around for 20 to 30 years, you have to get a guaranteed return on pay,” he said.
GLI, now a relatively well-known beneficiary of the AI capex supercycle, offers a long-term strategy for capitalising on the excitement surrounding AI, Jones argued.
“You get to participate in the AI supercycle, but you don't take the risk of finding out who will be the winner in that AI [race],” he told attendees at a company presentation on 6 November.
Why global exposure?
Jones echoed earlier observations from ClearBridge about the private sector increasingly supplying infrastructure capital, assuming a role traditionally held by governments.
While the OECD estimates developed economies need approximately $7 trillion annually for infrastructure investment, Jones noted that many government balance sheets remain constrained. This constraint, however, varies significantly by country.
For instance, Australia has consistently allocated a high proportion of government expenditure to infrastructure investment over the last two decades (around 5 per cent or more).
On the other hand, countries like the US and Germany allocate considerably less capital to infrastructure, with the US being described as "almost equivalent to Greece", and Germany sitting at a similarly low level of around 2 per cent.
“So this lends itself to what we would invest in knowing that there is a deficiency in infrastructure spending in particular economies,” he said.
Defensive benefits
Drilling into the figures, he noted that the use of AI datacentres is causing US electricity demand to surge at a pace unseen since the advent of air conditioning. The volume of new power now forecasted for the US is, in absolute terms, equivalent to the capacity of the entire power grid constructed throughout the 1950s and 1960s.
“Utilities used to be very sleepy. You can see there the earnings per share for a decade was around 5 per cent. Now they've now gone to 8 per cent and it could be maybe 10 per cent, and the reason for this is because of the need for investment,” Jones explained.
Simultaneously, he pointed to the two year forward consensus EPS data from American energy company, WEC Energy, as an example of earnings consistency in the sector - with a graph that showed a series of practically flat lines for each year.
“Every year, the earnings are very predictable, but you can see the gap between the lines is getting bigger…The earnings growth is a lot higher now than what it was a decade ago,” Jones said.
In addition, even with the fervor surrounding AI, he noted valuations for listed infrastructure assets have remained rational.
“And despite investor returns being pretty strong over the last three years, valuation hasn't moved and that's because the earnings growth has absorbed the investment return,” he said.
Beyond power, Jones further elaborated that infrastructure extends to include transport, waste, and other sectors which are subject to various structural, non-cyclical economic trends across the global economy.
Importantly, these structural, real assets are positioned to perform well even in the face of a recession or inflationary environment.
“If there's a return of inflation, most of the assets are monopoly assets, so inflation gets passed through. It's a very defensible asset class to hold, and there's 3 billion liquid opportunities,” Jones said.
As he explained, this is true even when comparing GLI to global real estate investment trusts (G-REITs), another core area for the firm.
Real estate, being a cyclical asset class with reliance on supply chains, necessitates a more active investment approach with strategic positioning across growth sectors like aged care facilities in the US.
At the same time, Jones concluded that the function of GLI is to act as a "defensive compound", rather than a substitute for global equities in a portfolio.
“Our job is to think about risk-adjusted returns, which is reduced volatility, reduced risk of drawdown, a compound slow leasing, such that you don't notice it, and one day it’s gone 20 or 30 per cent up.”
