If there is one thing I have learned in almost three decades in financial services, it is that everything carries some element of risk. So when it comes to finding a safe haven in uncertain times we must always remember there is no silver bullet.
That said, it is hard to argue against the long-term benefits of global listed infrastructure. Essentially, it is the physical assets that provide basic services to modern society, including utilities, transport, and communication assets.
Infrastructure will always need to be built and renewed – and the world is well behind where it needs to be. Figures from Oxford Economics in 2017 indicated that global infrastructure investment needed to be $94bn (£75.5bn) between 2016 and 2040 to close infrastructure gaps.
The ongoing supply and demand issues from Covid-19 and the move to decarbonisation are likely to have seen that number grow significantly since then.
The benefits of investing in infrastructure
The benefits are there to see; it is a low beta asset class that has demonstrated its ability to be lowly correlated to traditional investments, while also retaining a number of defensive characteristics. The defensive nature is supported by the fact infrastructure has an explicit link to inflation, courtesy of regulation, concession agreements or contracts.
Research shows around 70 per cent of investment assets owned by listed infrastructure companies have an effective means to pass through the impact of inflation to customers, to the benefit of shareholders.
Utilities, developed roads, oil pipelines, airports, mobile towers, and bulk rail are examples of sectors with such protection in place.
This, coupled with steady yields in what was previously a low interest world, have quickly made them popular with retail investors.
Is high inflation a threat?
But does the asset class look as attractive now we are in an inflationary environment with rising interest rates?
In the annus horribilis that was 2022 for investors, global listed infrastructure fell only 5 per cent, compared to significantly larger falls for both global equities (-18 per cent) and bonds (-16 per cent).
But there are now challenges on the horizon as the sector confronts a more inflationary environment, where volatility is also on the rise. We have to remember infrastructure sits in the real assets bucket and the replacement costs for this asset rise in line with inflation.
In addition to this we must remember that while infrastructure typically generates greater revenues and profits thanks to inflation linkage, this has started to be offset by the rise in interest rates.
This not only increases the cost of debt in an area where a number of projects are highly geared, but infrastructure is often thought of as a yielding bond proxy asset.
As the risk-free rate of government bonds has risen, investors are demanding a higher return on these assets as well, so prices need to fall.
