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All eyes on inflation-proof infrastructure as prices soar

By Jeremy Anagnos, portfolio manager of Nordea’s Global Listed Infrastructure strategy

17 June 2022

After nearly a decade of subdued inflation, the Covid-19 pandemic and geopolitical events have brought significant price pressures back to the world.

The impact of inflation, and subsequent central bank action, has been swift and severe this year – with growth-style equities and fixed income markets facing particular punishment. As a result of the evolving economic backdrop, investors are increasingly seeking segments of the market with proven resilience and inflation- protection qualities.

One such area is listed infrastructure, which is renowned for its stable and predictable cash flows. It is also largely immune to today’s historic price pressures, with more than 90% of the listed infrastructure space able to efficiently pass on inflation to the end-users of the assets.

Strong long-term tailwinds

Listed infrastructure includes a variety of sectors – such as communications, midstream energy, utilities and transportation. The companies within these industries are supported by numerous recent tailwinds and long-term dynamics. Driven by secular themes including decarbonisation, digital transformation, and asset modernisation – about $100trn of global infrastructure spending is set to occur over the next two decades, which represents a 50% acceleration from the prior two decades.

In terms of decarbonisation, infrastructure is uniquely positioned to lead and financially benefit from global sustainability initiatives. Electric utilities are at the forefront of net zero action, as companies install solar modules, construct wind turbines, and upgrade transmission lines to charge EVs and electrify our heating. As a result of global net zero policies, we estimate infrastructure companies may spend half of every dollar on decarbonisation through 2040.

Within digital transformation, physical assets – such as data centres, fibre networks, and cell towers – are essential to support the continued growth in data in the cloud. Data requirements are set to triple over the next five years, which should power further need for communications infrastructure.

As for modernisation, not only do infrastructure assets need repair, but they also require widespread upgrades to meet the demands of today’s economy. Whether it is replacing lead pipe for clean water, upgrading natural gas networks for hydrogen blending, or continuous improvement for transportation networks, infrastructure assets have ongoing modernisation needs that enable a baseline of cash flow growth.

Multiple drivers of return

While listed infrastructure’s stable and protective qualities are likely to lead to increased investor interest during these turbulent times, we also see multiple other appealing near-term drivers. Firstly, government policy and corporate actions continue to demonstrate their commitment to the clean energy transition. The recent European Commission REPowerEU Plan in response to the energy market dislocation would both increase and accelerate renewable energy investments. In addition, global corporations have leapt to sign purchase power agreements (PPAs) to secure clean energy for their manufacturing facilities, distribution sites, offices and retail locations. Utilities and energy infrastructure companies are benefitting from the increased investment activity which should drive higher near term cash flow growth.

The combination of investment activity and inflation linked cash flows will lead to infrastructure earnings outpacing global equity earnings for the foreseeable future, in contrast to previous years. Infrastructure cash flows and dividends will likely also increase above historical levels, given the need for global investment across the utility, energy, power, communications, and transportation sectors.

We also expect listed infrastructure’s appeal to both private equity and institutions to persist, which should further support values in the coming years. Over the past six years, private equity has bid for listed infrastructure assets and companies at a 30% premium* – a figure that has been continually increasing.

Finally, while listed infrastructure underpins many of the 17 UN Sustainable Development Goals, major ESG funds are under allocated to the asset class. The top 20 global ESG funds have just 5% exposure to companies leading environmental stewardship and the energy transition, as opposed to a 33% exposure to tech and communications services. As ESG fund flows continue to accelerate, demand for investments aligned to key themes of the infrastructure asset class – such as decarbonisation and clean water – is set to soar. We are optimistic that listed infrastructure can continue to enhance investor portfolios in the years ahead.

*Source: CBRE, Period under consideration: as of 1.1.2016 – 31.12.2021

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