There are more simultaneous major macroeconomic events going on right now than there have been in recent memory. War in Ukraine and Gaza continues to upend global trade routes. While tapered, inflation remains elevated. Lackluster recovery in China continues. Trends toward globalization are stalling, and in some instances reversing, as a result of supply chain disruptions. Artificial intelligence (AI) continues to seep more and more into our everyday lives. Finally, moreover, many big, impactful economies have already or will be conducting, incredibly consequential elections this year.
We believe infrastructure is a compelling investment opportunity due to its long asset life, stable earnings profile, and strong secular growth drivers.
Against this backdrop, we believe infrastructure is a compelling investment opportunity due to its long asset life, stable earnings profile, and strong secular growth drivers. We see three big thematic drivers of infrastructure growth: increasing urbanization (particularly in emerging markets), the energy transition and its strong government support, and the digital revolution, which is currently being supercharged by AI.
Investing in a better future
Infrastructure assets refer to the physical structures and facilities that are central to the functioning of a society. These assets typically service the backbone of economic activities and services. We break infrastructure into four different sectors.
Transportation
When talking about transportation, we are referring to the physical assets that facilitate the movement of people and goods, namely roads, rails, ports, and airports.
Roads are attractive assets as they are generally long-life concessions that have good pricing power and built-in inflation protection. Within toll roads, we have seen significant pricing innovation, with dynamic pricing in place on some assets that allow real-time price changes to respond directly to traffic changes. One of the other aspects of roads is the operational leverage from additional traffic (e.g., each additional car or truck comes at a high incremental margin).
Airports continue to benefit from the recovery in passenger numbers post-pandemic. While all airports have seen a significant improvement from the depths of the shutdown period, it's important to delineate between airports with high leisure travelers versus those with more of a skew to business travel, with the leisure-focused airports seeing passenger numbers above 2019 levels. Another attractive feature of airports is the captive audience for the retail and food side, with modern airports more resembling high-end shopping malls.
Across transportation, we believe there are strong growth opportunities within emerging markets. The combination of high gross domestic product and population growth generally leads to a growing middle class, which in turn drives increasing urbanization and consumer mobility behavior changes. This results in increased car ownership and thus, more traffic on the roads and more discretionary income to spend on additional expenses, such as air travel.
Communication
Within communications, we are referring to assets that facilitate the transfer and storage of data, such as cell towers and data centers.
Cell towers are the cornerstone of mobile networks, which are key enablers of the global digital economy. They have benefited from the digital revolution, with data growing exponentially and with the advent of all things AI, this trend will continue. Cell towers benefit from this growth due to the increasing capital expenditure needs of mobile operators. We believe they have stable and predictable income that comes from long-term lease agreements, generally having strong pricing power with low operating costs and high margins.
Utilities/Energy
Within utilities and energy, we mean the physical assets that produce and transport energy, such as traditional electric generation, green energy, electricity transmission, and gas pipelines. Utilities have historically proven to be recession-resistant because, no matter what happens, consumers need to turn their lights on, heat their homes, cook their food, and access running water. In addition, we believe utilities are well-positioned to take advantage of the energy transition.
One of the biggest areas for opportunity among infrastructure investments, we believe, is from energy transition. Policymakers in many countries across the world have embedded green energy into their policy plans. Today, more than 140 countries (and 90% of the world economy) – including the US, China, and EU countries – have net-zero targets.1
Just as important as the transition is the energy addition. In other words, the growth outlook isn't just focused on replacing fossil fuel with renewables but growing the capacity footprint to service the growing electricity demand. This growing demand for electricity is from electric vehicles, heat pumps, and more recently, the data center needs to be driven by AI. This means for the first time in over two decades we expect to see electricity demand growth in the US, for example.2
The world won't be able to execute this transition toward more renewable energy without significant infrastructure investment.
The world won't be able to execute this transition toward more renewable energy without significant infrastructure investment. This makes the energy transition one of the most exciting long-term prospects within our infrastructure outlook.
Long-term, stable return potential
Having covered the big thematic drivers of infrastructure, what are some of the key attributes we look for? These would include asking:
- Is it an essential service?
- Does it have a long operational life?
- Are there high barriers to entry?
- Does it have stable and predictable cash flow potential?
- Is there low demand elasticity?
- Are the underlying cash flows linked to inflation?
We believe stable and predictable cash flow potential is paramount. It is key to the valuation of the assets. It is key to ensure long-term return objectives are met. And it is key for the payment of a growing dividend (which most companies do).
Why now?
Why we believe the timing is right for infrastructure investing:
Asset class underpinned by positive secular shifts
We outlined the three main thematic drivers, namely increasing urbanization, energy transition, and digital revolution. Within these, there are also several sub-themes, such as growing emerging market population, aging infrastructure in developed markets, and deglobalization, or nearshoring.
Clear government support across the globe
Infrastructure spending is on the rise with initiatives like the US Infrastructure Investment and Jobs Act creating massive investments. The legislation is expected to provide up to $1.2 trillion in funding to refurbish roads and bridges, improve access to clean water and internet connectivity, and increase the number of clean energy projects.3
Technological advancements
Technologies like renewable energy, artificial intelligence, and smart grids are creating exciting opportunities for innovative infrastructure projects.
Diversification opportunity
Infrastructure offers a unique way to diversify portfolios, providing exposure to a different asset class with low correlation to traditional stocks and bonds. In fact, over the past 20 years, global-listed infrastructure has outperformed global equities and global bonds. This can help reduce overall risk and improve portfolio performance.
Final thoughts
With the backdrop of an uncertain macro and political environment, we continue to see infrastructure as an attractive investment area. Its combination of long life and stable cash flow-type businesses, with strong secular growth drivers behind them, makes it an appealing addition to a broader investment portfolio.
1 "The push for net zero." The Week, February 2024. https://theweek.com/environment/the-push-for-net-zero.
2 "Electrification, manufacturing to propel 1.5% annual US electric demand growth through 2026: IEA." Yahoo Finance, January 2024. https://finance.yahoo.com/news/us-electric-demand-set-grow-102033187.html.
3 "Infrastructure: Here's how states are benefiting from Biden's $1.2 trillion legislation." Yahoo Finance, May 2023. https://www.msn.com/en-us/money/other/infrastructure-heres-how-states-are-benefiting-from-bidens-12-trillion-legislation/ar-AA1bJUkP.
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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