By Juliet Schooling Latter, research director at FundCalibre
Infrastructure is all around us. It is the physical assets that provide basic services to society – it is our gas and electricity; our water; our schools and hospitals; roads and mobile phone towers.
There are a number of factors that make infrastructure an attractive long-term investment. For one thing, we are always going to need it, so it needs to be constantly maintained. For another, the world needs more of it – both as emerging markets develop and also as the way we live our lives evolves.
Importantly, given some key investor concerns at present, infrastructure has a link to inflation – in that it tends to contain assorted regulatory, concessionary and contractual agreements that offer a degree of protection should it rise – and it produces an income. Finally, it is a low-beta asset class that has demonstrated its ability to be lowly correlated to traditional investments.
New challenges on the horizon?
That said, there are now challenges on the horizon. 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, it also means yields are now looking rather less attractive in comparison to the risk-free rate of return.
At the same time, the transport and travel sectors have been slow to pick up since the Covid pandemic ended and, with inflation remaining sticky and the cost of living increasing, demand could be more muted as consumers tighten their purse strings.
What does this mean for the asset class over the medium term? While the income element is perhaps not as attractive in this environment, infrastructure does still offer diversification in an income portfolio.
Read the full article in Portfolio Adviser’s July/August 2023 magazine
