Infrastructure is vital to your daily routine and provides the basic services and facilities crucial for community development and prosperity.
Your lights are powered by an electric utility; your water comes from a water utility; you drive on toll roads or fly in and out of airports.
Aside from providing essential services, many infrastructure assets enjoy relatively inelastic, stable demand that has relatively low sensitivity to the economic cycle. Regulatory framework or concession agreements can also link infrastructure asset revenue to inflation and as significant capital is usually required to develop infrastructure assets, there is a high barrier to entry for would-be competitors. Furthermore, infrastructure assets typically have defined tariffs with many operating under long-term concessions, contractual agreements or under government backed regulation. All of this facilitates stable and predictable cash flows, which is good news for investors and provides the foundation for a very attractive investment opportunity.
The OECD expects infrastructure investment requirements in member countries over the next 20 years to more than double for electricity transmission and distribution; almost double for road construction; and increase almost 50% for water supply and treatment. The OECD also notes there is significant need for new transport infrastructure in Europe the US and China.
With government finances under even more pressure in recent years due to the global financial crisis, there are likely to be ongoing opportunities for private investment in infrastructure, both as governments continue to privatise state-owned assets and as new projects are facilitated by the private sector under contracts with government.
Developed market governments are pushing infrastructure development heavily. The Obama administration is encouraging the growth of renewable electricity generation, which requires an expansion of the transmission network to connect it to the existing grid. Governments will need to involve the private sector to upgrade infrastructure, as they will not be able to fund all of the required expenditure themselves, particularly after the global financial crisis which has seen government debt levels increase dramatically.
Infrastructure has been one of the main focal points of many government economic stimulus packages globally and while this boost will not be maintained indefinitely, the large demand for new and upgraded infrastructure in developed and emerging countries will be ongoing.
In emerging countries, demand for infrastructure is driven by two key demographic trends. Population growth in emerging markets is stronger than in the developed world and there is steady migration from rural areas to cities. Urbanisation is a key driver of infrastructure demand, with cities needing to be able to supply water, sanitation, electricity, gas and transport to their expanding populations. These two long-term secular trends drive the significant long-term demand for infrastructure, along with the forecast of strong economic growth in emerging markets. Some industry commentators estimate that $22trn will be invested in infrastructure in emerging markets between 2008 and 2018.
In China, a number of toll-road operators are expected to benefit from the increase in car ownership and the boost in heavy vehicle traffic from the expected recovery in foreign trade. Chinese gas companies are expected to benefit further from the growing demand for gas as a cheaper, cleaner and more efficient energy source.
Another emerging economy, Brazil, has significant infrastructure demands to support its strong economic growth, particularly as it will host the Fifa World Cup in 2014 and the Olympic Games in 2016. This will provide organic growth opportunities for infrastructure owners and operators.
A global infrastructure portfolio provides exposure to a range of infrastructure assets in around 15 countries that provide a very attractive risk/return profile, many of which would not usually be found in a broad global equity portfolio.
It provides exposure to what we believe will be the long-term growth of this sector, which is fundamental to our communities and economies and provides attractive diversification for investors.
Latest estimates show the market cap of listed infrastructure companies is over $4trn, and there should be more listed infrastructure investment opportunities in coming years.
In terms of performance, global listed infrastructure has provided attractive risk adjusted returns over the long term versus the MSCI World Index.
Over the same period and through the economic cycle, global listed infrastructure has performed strongly relative to global equities. It has captured more than 100% of the upside and provided good protection in down markets. Given these performance traits, listed infrastructure has historically displayed superior risk-adjusted returns compared to other equity based asset classes. Given its attractive risk/return profile, the inclusion of infrastructure in a portfolio as a substitute for part of a global equities allocation has historically improved the overall risk/return profile of a diversified portfolio.
While past performance is not necessarily an indicator of future performance, the attractive investment characteristics of infrastructure that have contributed to this return profile remain in place.
Justin Lannen, portfolio manager, infrastructure securities, Macquarie Funds Group
