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Why infrastructure and why now?

Technologically advanced, sustainable and resilient infrastructure can pave the way for an inclusive post-COVID economic recovery. Low- and middle-income countries could see $4 return for every $1 spent on building infrastructure that focuses on long-term resilience.”

Countries around the globe are set to launch the biggest round of infrastructure investment since the post-2008 financial crisis stimulus measures

World Economic Forum, 2020

Resilience

Public and private infrastructure assets have historically offered the following attractive characteristics:

  • Essential services supporting the community Essential services supporting the community
  • High barrier to entry
  • Potential for robust cash flows
  • Low demand elasticity
  • Underlying cash flows linked to inflation
  • Low correlation with other asset classes
  • Long operational life
  • Defensive in nature

Global listed infrastructure EBITDA remained positive through the 2008 global financial crisis

Global listed infrastructure vs global equities EBITDA growth since 2004

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SOURCE: LISTED INFRASTRUCTURE: GLIO (GLOBAL LISTED INFRASTRUCTURE ORGANIZATION) INDEX, AS OF DECEMBER 31, 2019. GLIO INDEX IS DESIGNED TO ENABLE COMPARISONS BETWEEN LISTED AND UNLISTED INFRASTRUCTURE ASSETS. GLOBAL EQUITIES: MSCI. MSCI IS CONSIDERED REPRESENTATIVE OF STOCK MARKETS OF DEVELOPED AND EMERGING MARKETS. THE INDEX IS COMPUTED USING THE NET RETURN, WHICH WITHHOLDS APPLICABLE TAXES FOR NON-RESIDENT INVESTORS. FOR ILLUSTRATIVE PURPOSES ONLY. EBITDA (EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION) CAN BE A MEASUREMENT FOR A COMPANY’S PROFITABILITY OR ABILITY TO GENERATE RETURNS.

Infrastructure’s key strengths in the current environment

Defensive sector
  • Limited number of dividend cuts of public infrastructure companies and no material valuation declines in private infrastructure securities during COVID-19; similar to trends during/after the global financial crisis*
Opportunistic
  • Public infrastructure equity values have fallen by 10-15% over the past few months creating the potential for attractive initial yields**
  • Potential for increased deal flow on the private side from cities/municipalities seeking to sell necessary infrastructure assets in anticipation of reduced tax revenues
Economic
  • Potential for acceleration of infrastructure projects by governments globally in order to stimulate local economies and “get people back to work”.
  • Proposal by the European Commission on May 27, 2020 for a €750bn recovery fund with 25% of the recovery fund earmarked for climate action.
Inflation Hedge
  • Bringing supply chains “home” domestically to increase resilience, but raises prospect of inflation
* IFM Investors, June 2019
** As of May 31, 2020 the S&P Global INFRA INDEX WAS DOWN 18.34%. [S&P GLOBAL INFRA INDEX IS AN UNMANAGED INDEX CONSIDERED REPRESENTATIVE OF THE INFRASTRUCTURE MARKET.]
 
 

Spending shortfalls—projected to totalsome $5.5 trillion worldwide when compared with the level needed to maintain current GDP growth—are already straining global infrastructure.

McKinsey Global Institute, December 31, 2019

Key drivers of infrastructure investing

  • Aging infrastructure and the infrastructure deficit
  • Population growth has led to a young, growing working-age population
  • Urbanization is putting strain on current infrastructure
  • Technological advancement and increasing societal expectations
  • Foreign Direct Investing is a growth driver of infrastructure investment
  • COVID-19 recovery programs include significant Infrastructure spending
SOURCE: ABERDEEN STANDARD INVESTMENTS, OXFORD ECONOMICS, UBS, CREDIT SUISSE, CLSA, RENCAP, APRIL 2015.

Global urbanization is increasing demand for new infrastructure

2018 – 2035 Projection
Rank City Pop.Change
(millions)		 Percentage Change
1 Delhi, India 14.8 52%
2 Tokyo, Japan -1.5 -4%
3 Shanghai, China 8.8 34%
4 Dhaka, Bangladesh 11.7 60%
5 Al-Qahirah (Cairo), Egypt 8.4 42%
6 Mumbai (Bombay), India 7.4 37%
7 Kinshasa, DRC 13.5 102%
8 Mexico City, Mexico 3.8 18%
9 Beijing, China 5.7 29%
10 São Paulo, Brazil 2.8 13%
11 Lagos, Nigeria 11.0 81%
12 Karachi, Pakistan 7.7 50%
13 New York-Newark, US 2.0 11%
14 Chongqing, China 5.7 38%
15 Kolkata (Calcutta), India 4.9 33%
16 Lahore, Pakistan 7.4 63%
17 Manila, Philippines 5.2 38%
18 Kinki M.M.A. (Osaka), Japan -0.9 -5%
19 Bangalore, India 6.6 58%
20 Istanbul, Turkey 3.2 22%
21 Buenos Aires, Argentina 2.2 14%
22 Guangzhou, Guangdong, China 4.1 32%
23 Tianjin, China 3.2 24%
24 Chennai (Madras), India 4.9 47%
25 Shenzhen, China 3.3 28%
Rank City Pop.Change
(millions)		 Percentage Change
SOURCE: UNITED NATIONS, DEPARTMENT OF ECONOMIC AND SOCIAL AFFAIRS, POPULATION DIVISION (2018), WORLD URBANIZATION PROSPECTS: THE 2018 REVISION. ESTIMATES AND FORECASTS ARE NOT GUARANTEED. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. FOR ILLUSTRATIVE PURPOSES ONLY.

Cumulative Infrastructure Investment at current trends vs needs (US$tn)

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Total forecast infrastructure gaps mapped out

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SOURCE: WORLD BANK G20 GI HUB OUTLOOK, OXFORD ECONOMICS (2019). ESTIMATES ARE OFFERED AS OPINION AND ARE NOT REFLECTIVE OF POTENTIAL PERFORMANCE, ARE NOT GUARANTEED AND ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. FOR ILLUSTRATIVE PURPOSES ONLY.

Population growth putting a strain on current infrastructure

The UN estimates that the world’s population is projected to grow from 7.5bn in 2017 to reach 9.8bn by 2050

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SOURCE: UNITED NATIONS, DEPARTMENT OF ECONOMIC AND SOCIAL AFFAIRS,1 POPULATION DIVISION, JUNE 2020. ESTIMATES AND FORECASTS ARE CONSENSUS OPINION AND ARE NOT GUARANTEED. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. FOR ILLUSTRATIVE PURPOSES ONLY.

Government infrastructure spending is center stage

 
China Belt and Road Initiative US Nationwide public safety broadband network
US Bridge improvements a must Brazil Increased infrastructure investment a must for economic growth & recovery
France Reduce congestion while connecting urban and rural India Targeted to incentivize much needed private sector investment
SOURCE: UBS CREDIT SUISSE, CSLA, ABERDEEN STANDARD INVESTMENTS, BUSINESS INSIDER, MARCH 2017. FOR ILLUSTRATIVE PURPOSES ONLY.

Post COVID-19 world — we expect global demand for infrastructure spending to increase

 
United States
Republicans and Democrats are in agreement on the crucial need for national infrastructure spending for both current and long term needs
  • President Trump has called for a “VERY BIG & BOLD” infrastructure package
  • A $2 trillion infrastructure package has been provisionally agreed by both parties1
Potential impact of a $2 trillion spending package over 10 years on the US economy2
  • $5.7 trillion increase in U.S. economic activity, offsetting recession losses2
  • 2.3 million new jobs by 20242 0.5% increase in GDP growth per year from 1.7% to 2.2%2
Infrastructure spending plans are already being announced at the state level
  • Illinois has announced $25 million in grant funding3
  • 3 Southwest Michigan counties are set to benefit from $22.5 million to provide federal funding to deliver high-speed Internet4
Rest of world
Infrastructure investment is already rising in China as it recovers from the COVID-19 crisis5
  • Infrastructure investment increased 4.6% YoY in April vs -8.1% YoY in March5
  • 30-60% sales volume growth for excavators, wheel loaders and heavy-duty trucks in April 2020 alone5
  • Infrastructure investment for FY20 is predicted to be +10-15%, supported by double-digit growth in the coming months5
The rest of the world is following suit accelerating infrastructure spending plans
  • "The number of GBs transmitted over all European mobile networks had been growing by +45%, pre-crisis - but this figure suddenly spiked to +60% by mid-March 2020.”6
  • The UK government has announced a plan to invest £640 billion into roads, railways, schools, hospitals and power networks over the next 5 years, "triple the average over the last 40 years in real terms".7
  • In Canada, Manitoba has pledged a further CA$500 million ($360 million) of funding for infrastructure on top of the planned CA$3 billion ($2.16 billion) over the next 2 years8
  • New Zealand unveiled a record NZ$50 billion ($30 billion) spending package in May with billions set aside for infrastructure projects9

1 New York Times article “Trump and Democrats Agree to Pursue US$2 Trillion Infrastructure Plan”, April 30, 2020.

2 Source: Infrastructure: What Once Was Lost Can Now Be Found — The Productivity Boost, S&P Global, April 2020.

3 Illinois.gov, May 12, 2020.

4 USDA.gov, May 13, 2020.

5 HSBC Global Research, May 15, 2020.

6 Morgan Stanley Research, June 1, 2020.

7 Source: Investment Week, March 11, 2020.

8 Source: Construct Connect, May 14, 2020.

9 Source: Thomson Reuters, May 14, 2020.

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