Infrastructure equities – firm foundations for a volatile world

The Trump tariff shock has caused significant global market disruption. Investors are now naturally reorientating towards safe-haven assets that can provide a measure of security amid all the volatility. We think infrastructure ticks many boxes and provides a firm foundation in today’s turbulent world.

Real assets with inherently stable demand

Infrastructure assets have several structural features that make them more resilient to prevailing economic and market conditions. Infrastructure assets are physical ‘real assets’ (as opposed to financial assets) that typically provide critical services that society needs, regardless of the economic climate. Examples include utilities, telecommunications towers, and natural gas pipelines – all indispensable to modern life, ensuring stable revenues.

Inflation protection

Infrastructure assets’ income streams are often regulated or contracted for long periods through ‘power purchase agreements’ or ‘take-or-pay’ contracts, providing additional security. Crucially, inflation-linked pricing is often included in these contracts, ensuring inflation-protected income streams. This is especially relevant in the current context of increasing trade tariffs which, by pushing up import costs, could be significantly inflationary.

Diversification benefits

A key source of infrastructure assets’ resilience is their low correlation with other assets. This is due to idiosyncratic factors like regulatory changes, technological advancements and geographical regions. An allocation to infrastructure assets can improve portfolio diversification and enhance efficiency, with higher expected returns relative to any given risk. The same logic was behind the traditional 60/40 equity/bond portfolio concept. In recent decades, however, the correlation between bonds and equities has strengthened, underscoring the need to seek diversification through alternative assets, such as infrastructure.

Enduring long-term growth drivers

Global infrastructure spending is a megatrend that is widely supported and prioritised by numerous governments across the world. Polices are often driven by demographic trends such as population growth and increasing urbanisation, necessitating increased infrastructure spending. Policymakers also increasingly view infrastructure spending as an economic growth enabler and multiplier. A good example is the near-universal efforts to boost technology industries and digitalisation, requiring substantial investment in fibre networks, 5G networks and data centres.

And then there’s the drive towards cleaner energy. As shown below, trillions of dollars of investment will be needed across multiple key-emitting sectors to achieve the net-zero carbon targets set by many governments and companies.

Table 1: Projected investment needed by different sectors to achieve net-zero targets

Source: Systemiq analysis for the ETC (2023); BloombergNEF (2022), Counting Cash in Paris Aligned Pathways – analysis based on IEA Net Zero scenario. NOTE: Numbers may not sum to totals due to rounding. 

Significant outperformance

Global infrastructure equities have significantly outperformed broader global equities over the long term (see chart).

Chart 1: Global infrastructure equities v global equities – long term performance (%)

As we highlighted, a well-known attraction of infrastructure assets is their relative safety during periods of increased market volatility. As shown below, global infrastructure equities have (so far) remained more resilient amid significant tariff-related upheaval. 

Chart 2: Global infrastructure equities v global equities – short term performance (%)

Final thoughts…

Infrastructure assets have several attractive features, including stable, often inflation-protected revenues backed by physical assets in demand-inelastic sectors. These features position infrastructure as a relative safe haven in times of economic uncertainty and market volatility. Amid the current global trade conflict, which is a risk for both growth and inflation, we think now could be an opportune time for investors to consider infrastructure equities.

Josh Duitz is Global Income and Head of Infrastructure (Public Markets) at Aberdeen.

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