Investment in a Minute - Make Infrastructure Great Again

“The tailwinds for infrastructure we believe are powerful and long term, particularly around decarbonisation, digitisation, deglobalisation and demographics.”

- Nicholas Cunningham, Deputy Fund Manager 

For more information on the financial terms used in this article, please consult the glossary.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. The views expressed in this document should not be taken as a recommendation, advice or forecast. Past performance is not a guide to future performance. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.

After a challenging 18 months, we believe that fortunes of listed infrastructure could be on the verge of changing. 

The first half of 2024 presented a ’perfect storm’ for listed Infrastructure, marked by higher interest rates, negative sentiment towards renewables and the dominance of mega-cap technology. However, with several countries initiating rate cuts and the US remaining on hold, we anticipate that the worst impacts of higher yields on infrastructure-related asset valuation are largely behind us.

While we patiently wait for the macroeconomic backdrop to shift, listed infrastructure will continue to benefit from long-term structural trends like decarbonisation, deglobalisation, digitisation and demographics – powerful themes we believe will endure for many decades to come.

Long Term Structural Opportunities

The tailwinds for infrastructure we believe are powerful and long term, particularly around decarbonisation, digitisation, deglobalisation and demographics. 

The Asia-Pacific region is already pivotal in the global decarbonisation effort. According to IRENA (International Renewable Energy Agency), global renewable capacity grew by 14% to 3,870GW in 2023, with China alone accounting for nearly 70% of that growth. The IEA (International Energy Agency) forecasts that despite Chinese economic slowdown, electricity demand in China will grow +6.0% in 2024 and 2025, driven by growth in sectors like electric vehicles and data centres. 

Digitalisation, driven by the advancement of AI, is also underpinning a structural shift higher in both data centre demand and power consumption. The need to provide state-of-the-art data centre facilities adequately powered by renewable and sustainable power sources requires major infrastructure investment. Macquarie forecasts that data centres will account for 7% of global power demand by 2035, a near five-fold increase from today. They also note that the Asia-Pacific is second globally to North America, with 31% of both operating capacity and development pipeline in data centres. 

Why inflation is good for infrastructure investments 

Inflation-linked revenue protection and real cash distribution growth are key features of infrastructure investments. For example, this is achieved through regulated returns and price escalators. One good regional example is Australian toll road operator Transurban, who has nearly 70% of its toll road revenues CPI-linked, with most of the remainder fixed at a 4% escalation, reverting to CPI-linked escalation in 2029. However, inflation is not the only source of infrastructure revenue growth. Listed infrastructure is also a beneficiary of the powerful long-term structural opportunities highlighted earlier.

Navigating Peak Period Interest Rates

There is no question that the recent macroeconomic backdrop of higher interest rates has been unfavourable for listed infrastructure assets and the associated investment strategies. The nature of the industry - being geared towards ownership of physical real assets - and its correlation to duration has meant a period of under- performance versus broader equity indices, which have been driven by more “exciting” technology stocks recently. 

Listed infrastructure’s strong relative outperformance of 2022, when the sub-asset class provided much-needed diversification as wider stocks and bonds fell in tandem, seems a distant memory.

As we move through 2024, resilient economic growth and stubbornly high core US inflation have maintained a ‘higher for longer’ stance. However, this could reverse quickly if either growth or inflation slows and the Federal Reserve is forced to accelerate rate reductions. Several countries have now started the rate cut process, and while the US remains on hold, we hope that the damage from higher yields on infrastructure-related asset valuations is largely behind us.

Investor Appetite and Valuation Opportunities: The Gap to Close

What has been striking is the ongoing strong investment appetite in the private infrastructure market. Over the last several months, Brookfield, Macquarie and KKR have raised significant war chests for structural growth. For example, KKR raised $6.4bn specially for an Asia Pacific infrastructure fund in February 2024. 

We are also seeing active investment regionally. In March 2024, Ferrovial, a global toll road and airport owner-operator, announced it had agreed to acquire a 24% stake in IRB Infrastructure Trust, which holds a portfolio of 12 toll road concessions in India and a pipeline of 3 concessions for EUR 740m from affiliates of Singaporean institution GIC.

Interestingly, according to CBRE, the average private market deal multiple of 17.9x implies a valuation gap for the listed market at 12.7x, a 29% discount. This suggests a compelling valuation opportunity in the listed market.

Outlook for Listed Infrastructure: Steady Growth on the Horizon

We believe listed infrastructure will continue to provide a liquid means of accessing compounding income growth, with economic resilience and inflation protection.

Besides interest rates, we expect US elections to remain a key focus for investors into the second half of 2024. Our perspective is the US election outcome is unlikely to significantly change the listed infrastructure outlook. The reason is the Inflation Reduction Act (IRA) is beneficial for “Make America Great Again” supporters, noting that of the 220 IRA projects started in the US, 45% are in Republican states. 

Whilst the political and economic outlook remains uncertain, we believe decarbonisation, digitisation, deglobalisation and demographics will continue to provide a favourable long-term tailwind for listed infrastructure.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. The views expressed in this document should not be taken as a recommendation, advice or forecast. Past performance is not a guide to future performance. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.

The content of this page reflects M&G’s present opinions reflecting current market conditions. They are subject to change without notice and involve a number of assumptions which may not prove valid. All information included in this page has been written for informational and educational purposes only and does not constitute an offer or solicitation to invest into any security, strategy or investment product. Information given in this document has been obtained from, or based upon, sources believed by us to be reliable and accurate although M&G does not accept liability for the accuracy of the contents.