Investors eyeing a better road ahead for infrastructure

Poles, wires, railways, roads and airports: here’s why investments in infrastructure may be about to take off again.

Infrastructure assets were knocked around in 2023 by rising interest rates, but the future for poles, wires, pipelines and roads looks brighter for investors.

Some infrastructure investment funds fell sharply as the sector underperformed global equities, and analysts say it may be wise to look offshore in 2024 for the best returns.

The looming return of lower interest rates should boost demand for infrastructure and its solid, reliable income returns.

Equity Trustees Asset Management head of equities Chris Haynes said infrastructure performed poorly in parts of 2023 because debt levels were high, interest rates were high and valuations were expensive.

Mr Haynes said the outlook for infrastructure stocks was reasonable after interest rates looked to have stabilised, reducing the sector’s biggest negative.

Increased electrification globally should benefit infrastructure investors.

However, the low interest rate cycle of the past 10-15 years that had given infrastructure a tailwind was over, he said.

“We like the infrastructure sector as an investment class, but it can be difficult to get too excited with current valuations.”

Lazard Asset Management portfolio manager Warryn Robertson said there were pockets of attractive value opportunities, particularly in Europe.

“Inflation has been running strong in most developed countries, resulting in increases in interest rates from historic lows,” he said.

“High bursts of inflation have positive cashflow implications for toll roads, airports, railways and non-US utilities.”

Mr Robertson said infrastructure assets finished last year strongly – as did equity markets – but were “substantially behind broader global equity indices over 2023”.

Three of his firm’s biggest investments are global toll road and airport operator Ferrovial from Spain, US freight railroad company Norfolk Southern and British utility giant National Grid.

“National Grid … should produce significant value creation over the next five or more years,” Mr Robertson said.

Ausbil Investment Management head of global listed infrastructure Tim Humphreys said infrastructure valuations did not currently reflect cashflows generated by the assets and were “cheap in the current market”.

“This is a compelling time to be increasing exposure to global essential infrastructure,” he said.

“Over the past 12-months, essential infrastructure has underperformed global equities by some 20 per cent. A move of such size has only recently been matched by the experience during the pandemic lockdowns of 2020 and 2021.

“This means that infrastructure investors can buy inflation-adjusted future cashflow at even more of a discount.

Mr Humphreys said the world’s relentless surge in mobile data consumption – nearly doubling in just two years – was a driving force behind global demand for mobile phone tower companies.

Airport infrastructure is constantly expanding.

“Electric utilities are well poised to see an increase in demand for electricity, after many years of decline,” he said.

“The journey to net zero really means the electrification of everything, including transport, industry and commerce, and this will lead to an increased demand for electricity over the coming years.”

Global equity manager ClearBridge Investments said infrastructure’s defence and diversification could make it valuable in 2024.

“In 2023, increasing earnings and strong fundamentals were not enough to keep infrastructure valuations from falling due to the rise in real bond yields,” said ClearBridge portfolio manager Nick Langley.

“If 2023’s spike in real bond yields fades, we expect a significant up-tick in the valuations for infrastructure companies in the next year or two,” he said.