Head of Global Listed Infrastructure
This month we debunk some of the common myths surrounding global listed infrastructure - an asset class which is becoming an increasingly important component of a well-diversified portfolio.
Myth 1: Infrastructure is a boring old 'economy style' investment
A common misconception is that infrastructure assets represent, for the most part, old economy style investments with little potential for growth and limited relevance to future economic needs. In reality nothing could be further from the truth. Consider some of the key global secular themes that are shaping the future of investment markets (such as water, communications, shale gas, electricity production)… infrastructure assets lie at the core of many of these. McKinsey estimates that US$57 trillion will be spent on Infrastructure worldwide by 2030.
An expanding human population, coupled with unpredictable global water distribution, makes the ability to store and efficiently deliver a reliable water supply imperative. Around 70-80% of available water is currently used for agriculture and this will be exacerbated in future as developing economies, such as China, increase their demand for meat with an associated increase in water demand. As an example, it takes 957 gallons of water to create a single Big Mac! Some forecasts say that, by the year 2030, the global demand for water will exceed the global supply of water by an astounding 40%.
Communication and data usage
The ability to deliver and enable the technological and communication requirements for the new economy is reliant on effective infrastructure. Global mobile data traffic is expected to increase nearly 11-fold between 2013 and 2018!
Fracking technologies have enabled new sources of natural gas to be extracted from hitherto uneconomic shale formations. This represents an important addition to meet the insatiable global demand for energy. $A641 billion of investment in midstream energy infrastructure will be required through to 2035. This implies an annual expenditure of $A29 billion.
Electricity production and transmission
The production and delivery of an economic electricity supply will become increasingly important in enabling and maintaining global economic growth.
Myth 2: Infrastructure assets are very susceptible to interest rate hikes
In reality, infrastructure assets typically exhibit qualities that provide dual protection against rising interest rates. Firstly, infrastructure companies have longer-term debt structures. This means they are only obliged to refinance small proportions of their debt in the short-term but have the option to refinance longer-term debt at favourable rates should market conditions allow. Secondly, contracts and regulation are often negotiated on a ‘cost-plus’ basis allowing charging structures to be increased in an environment of rising interest rates. In addition, if interest rates rise due to an increase in GDP, then this provides natural economic support and an associated increased demand for infrastructure assets.
Myth 3: Listed infrastructure returns have run out of steam
Yes, the asset class has performed well over the last five years, but does this mean it’s run out of steam? Not necessarily. The asset class ‘overcorrected’ during the Global Financial Crisis, and we believe it’s only recently returned to its long-term growth trend. This means it still has plenty of upside potential given the fundamentals.
In a low interest environment with the associated chase for yield, an asset class which exhibits a defensive and stable yield profile, coupled with strong potential for growth, is an obvious candidate for consideration in any well considered long-term investment strategy. This relatively new asset class also affords exposure to the type of investment previously only accessible by institutional investors.
Important note: While every care has been taken in the preparation of this information, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This information has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Certain information in this website has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. We have not independently verified this information and cannot assure you that it is accurate or complete.