From the railroads of the Industrial Revolution to the extensive road systems that ushered in the automobile era, durable infrastructure has been the backbone of thriving economies.
Today, the rise of artificial intelligence (AI) is supported by data-driven and power infrastructure. The growth in data usage and mobile connectivity is unparalleled and continues to expand at a rapid pace.
Artificial intelligence and data proliferation
So far, the AI investment story has been dominated by a handful of companies at the forefront of developing large language models – sophisticated text-based AI tools. But an entire ecosystem needs to be built to support the growth of this new technology – to transmit, process and store the massive amounts of data that’s generated.
Everyone needs to [invest in telecommunications infrastructure], but the need is most acute in the developing world, ...
To meet this demand, the world must invest heavily in telecommunications infrastructure – cell towers, data centers, broadband, 5G, and cloud networks. Everyone needs to do this, but the need is most acute in the developing world, where many countries have bypassed earlier technologies to adopt the digital ecosystem directly. However, the surge in data is just one piece of the infrastructure jigsaw puzzle. With greater data usage, energy demands escalate.
Energy transition, consumption
Energy is the next piece of the jigsaw. We see a convergence of two enduring trends – the transition to more sustainable energy sources and a significant increase in energy demand.
The pivot towards renewable energy and sustainability goals has opened big opportunities in renewable infrastructure – wind, solar, and hydroelectric power. These technologies have been displacing fossil fuels for some 15 years. They will now become important in supporting a transformation in our energy consumption patterns. That’s because power demand will increase. Power usage in the US over the past 20 years has grown less than 1% a year. In Europe, it declined by some 10%. But this is about to change.
Developed markets, especially, will consume more power for three key reasons:
- Onshoring – Bringing home factories from other countries.
- Electric vehicles (EVs) – EVs replacing those with an internal combustion engine.
- Graphics processing units (GPUs) – Energy-hungry graphics processing units at the heart of AI.
This rise in energy demand highlights the need for more investment in energy infrastructure to ensure reliability and sustainability.
Demography, urbanization
Demography and urbanization make up the third piece of the jigsaw. The world's population has doubled over the past 50 years, while urban populations have tripled over the same period. These trends have placed a massive strain on existing infrastructure.
Our global population is expected to grow another 20% by 2050.1 Meanwhile, the number of people living in cities is projected to increase by some 50%, much of this in the developing world.1
There is a growing need for infrastructure — utilities, rail, and roads — to support urbanization, particularly in developing markets.
There is a growing need for infrastructure – utilities, rail, and roads – to support urbanization, particularly in developing markets. But data-driven infrastructure will also be critical. Emerging markets are already plugged into the digital economy. For example, data demand in Africa is projected to quadruple by 2028.
What should investors look for?
We suggest focusing on infrastructure companies that may benefit from long-term contracts – which generate a steady, predictable income – and have minimal exposure to commodity risk.
An investment strategy may span energy, roads, airports, ports, utilities, cell towers, and data centers. Geographic diversification is essential.
A well-chosen portfolio has the potential to deliver stable returns – a valuable quality in volatile markets. Many infrastructure investments also have revenues that are directly linked to inflation. While inflation is falling, inflation protection offers a buffer should prices rise again.
Final thoughts
We are part of a digital-driven economy where smartphones, online meetings, and remote work have become the norm for many people. The demand for data is set to continue on an upward trajectory. Infrastructure investment is critical, offering reliable and steady growth. Without it, consumer-oriented AI and the energy transition will face challenges, and many in the developing world may not reach their full potential. With infrastructure investing, there’s much more at stake than just dollars and cents.
1 "Growing at a slower pace, world population is expected to reach 9.7 billion in 2050 and could peak at nearly 11 billion around 2100." UN News, June 2019. https://www.un.org/development/desa/en/news/population/world-population-prospects-2019.html.
Important information
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
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