Listed infrastructure: Seizing opportunities amid global change

Key takeaways

• Infrastructure investment supports technological advances and clean energy shifts.
• Infrastructure assets can offer stable income and portfolio diversification.
• Lower interest rates make infrastructure projects more attractive.

The world is undergoing transformative changes, with technological advancements such as artificial intelligence (AI) set to reshape daily life. At the same time, the pursuit of a cleaner, safer future remains a priority for governments and citizens alike.

To support these sweeping changes, infrastructure must evolve and strengthen, presenting unique investment opportunities. Beyond the inherent benefits of listed infrastructure—such as providing stable dividends, offering diversification, and acting as an inflation hedge—there are now compelling reasons for investors to consider this sector.

The unique appeal of listed infrastructure

Listed infrastructure encompasses essential sectors such as regulated utilities (water, electricity, gas, renewables) and user-pay assets (railways, roads, airports, communications, ports). These assets are pivotal to economic activities and offer compelling investment potential due to their unique characteristics.

The appeal of listed infrastructure lies in its ability to generate stable income streams. Central to this is the consistent growth in underlying assets, which ensures regular dividend payouts that often outpace inflation rates. This income stability can make it an attractive choice for investors seeking reliable returns in varying economic conditions.

Listed infrastructure assets also provide valuable diversification benefits within investment portfolios. They exhibit low correlation with traditional asset classes like equities and bonds and can enhance overall portfolio stability. This resilience is rooted in the essential nature of infrastructure services, which maintain demand stability through economic cycles.

Moreover, revenues from infrastructure assets are frequently linked to inflation, serving as a natural hedge against rising prices. This characteristic enhances the sector’s attractiveness during periods of economic uncertainty and inflationary pressures.

Capitalising on key trends

Beyond these inherent benefits, infrastructure offers a unique opportunity to benefit from key trends reshaping our world. The rapid growth of AI is driving an unprecedented demand for power. In the next five years, consumers and businesses are expected to generate twice as much data as they did over the past decade. To support this, major tech companies plan to invest $1 trillion in data centers, which will significantly increase power needs.

• In the next 5 years, consumers and businesses are likely to generate twice as much data than created over the past 10 years.
• Major tech companies are expected to invest US$1tn in data centres over the next 5 years.
• Globally, power demand is expected to grow at CAGR of 14% over the next 3 years.
• AI data centre racks could require 7 times more power than traditional data centre racks, leading to a high case CAGR for power demand of almost 20%.
• Global investments in data centres expect to see 5% CAGR, rising to US$41bn by 2026.

Another major trend is the shift to clean energy. Infrastructure is crucial for deploying renewable energy sources, phasing out polluting power plants, strengthening energy networks, and transitioning to cleaner fuels like hydrogen. These efforts are essential for meeting global decarbonization goals.

To support these changes, significant investments in network infrastructure are needed. This includes updating aging systems, improving resilience to protect against risks, and realigning supply chains to be closer to home. Globally, power demand is expected to grow by 14% annually over the next three years, requiring substantial investment. Investments in data centers are projected to grow by 5% annually, reaching $41 billion by 2026¹. Infrastructure plays a critical role in ensuring that these energy and investment needs are met efficiently.

The strength of infrastructure lies in its ability to adapt and support these major trends which can make it a stable and attractive investment. By embracing AI advancements, committing to clean energy, and investing in strong network infrastructure, we believe the sector is well-positioned to thrive in the changing economic landscape.

The impact of falling interest rates

Another boost for infrastructure could come in the form of lower interest rates. Recently, the European Central Bank (ECB) lowered rates for the first time in five years, with other major central banks set to follow. Lower interest rates reduce the financing costs of global infrastructure projects, making them increasingly attractive to investors.

Historically, global listed infrastructure has demonstrated robust returns following rate cuts by the US Federal Reserve, consistently outperforming broader global equities. This trend underscores infrastructure's appeal amidst changing macroeconomic conditions.

• This chart shows the average 6-month, 1-year, 3-year, 5-year infrastructure performance following the last Fed rate hike before a cutting cycle begins.
• It covers 5 Fed rate cuts in 1989, 1995, 2001, 2007 and 2019, irrespective of economic conditions.
• We looked at the individual stocks in our core universe of stocks (RARE 200) vs a proxy for global equities (MSCI ACWI). 
• It is clear that in the dawn of the last 5 rate cut cycles, our core Infrastructure stock universe has historically delivered compelling returns in absolute and relative terms.

The macroeconomic environment is now transitioning from a period of potential headwinds to one of tailwinds due to these rate adjustments. This shift aligns with a favourable valuation backdrop, further bolstering the sector's attractiveness. Infrastructure doesn’t rely on falling rates; however, its enduring strength lies in its essential service nature and income stability, as well as long-term thematic drivers, such as the growth of AI and decarbonization.

Conclusion: the future of infrastructure investment

As we navigate an era of rapid technological advancement and increasing emphasis on sustainability, infrastructure emerges as a crucial investment opportunity. By adapting to and facilitating these changes, infrastructure not only supports economic growth but also offers investors the potential for stable returns, an inflation hedge, and valuable diversification. we believe that embracing these opportunities today could unlock significant potential for the future, making infrastructure an important component of a forward-looking investment strategy.