Listed Infrastructure: opportunities in a changing world
The world’s infrastructure needs an upgrade. Here’s how investors can make the most of this global opportunity.
Investment in infrastructure is nothing new. Many pension plans started getting interested in the asset class back in the 1990s, when Australia started privatizing several airport and electricity assets. Demand is still strong today with both institutional and private investors. Listed infrastructure is popular because it offers sustainable, inflation-protected cash flows while avoiding the challenges associated with investing directly in energy and transport projects.
Time for an upgrade
Modernization is a dominant theme internationally. The McKinsey Global Institute estimates that US$69 trillion needs to be spent on critical infrastructure worldwide by the year 2035 to keep up with demand. The inevitable financing gap is where private capital can make its mark.
Underinvestment in the space is well documented. This might be beginning to change, as governments continue to try and generate a recovery from the COVD-19 pandemic. Infrastructure-related stimulus measures are taking shape across the European Union, the United Kingdom, Japan, Australia and the United States. This is good news for listed infrastructure. With most public balance sheets under extreme pressure, private sector ownership will be critical in getting many projects over the line.
1Source: McKinsey Global Institute, October 2017 “Bridging global infrastructure gaps”
Focus on clean energy
An estimated 30%-40% of global carbon emissions come from electricity, so the importance of finding a solution is unambiguous. This urgency is reflected by supportive regulatory environments around the globe. In the U.S., 74% of electricity generation is in states with green energy initiatives. Shrinking cost curves in solar and wind energy is also key. Prices (without subsidies) are now lower than traditional fossil fuels. This downward trend is expected to continue.
All in all, the decarbonization of electricity will almost certainly mean strong earnings growth for electric utilities into the future.
The role of data
Telecommunication tower and data center companies are set to keep benefiting from structural growth trends. The appetite for wireless data is seemingly insatiable. The rise in social media, online banking, and smart phone usage in general have all contributed to this growth. The rollout of 5G networks around the world will impact not just wireless speeds but also new commercial opportunities like robotics, autonomous vehicles, smart cities and more.
The expansion of the independent tower model beyond the U.S. could also be a driver of growth. Unlike the rest of the world, U.S. phone towers are typically owned by independent companies. Adopting this approach could increase margins by hosting more tenants on any given tower, instead of being beholden to one.
The world’s population keeps growing
It’s projected that 2.5 billion people will be added to the world’s urban population by 2050. This will mean 68% of people will live in cities and towns around the planet. The pressure this will put on infrastructure around the planet will be enormous. The opportunities for private capital will be huge too.
Toll roads play a crucial role managing traffic congestion in densely populated areas, helping to get people where they need to go quickly and safely. As cities grow, governments will increasingly turn to publicly traded toll-road operators and other forms of private sector infrastructure funding to help.
Commercial air travel is another sector for investors to consider. Despite the negative impact of the COVID-19 pandemic on passenger numbers, the long-term growth trend remains positive. The International Air Transport Association has projected a 3.7% average growth in annual passenger numbers from 2019 to 2039. Population growth and an expanding middle class across the developing world should help fuel this demand.
The bottom line
The direction of travel has been set. Against a backdrop of climate change, growing cities, and supportive government regulation, the opportunities for investment in infrastructure are immense. The necessity for energy and transport upgrades is the same in both developed and emerging economies. Listed infrastructure is the asset class that is best positioned to reap the rewards of this trend. It provides investors ease of access to projects where previously only the largest institutional players would have been comfortable. As the world changes, investors must be agile too.
Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.