It’s Infrastructure’s Time to Shine. Here’s What Investors Should Know About the Asset Class.
With inflation running hot across global markets, investors are looking for a hedge against stubbornly high inflation. For those looking to achieve inflation-linked absolute returns, infrastructure provides many unique and attractive characteristics that make it a compelling option compared to other asset classes, like commodities or real estate. Given the significant risks within the current market environment, including recession fears, global political tensions, rising global rates and high inflation, we think investors can benefit from growing their allocation to infrastructure.
Infrastructure provides the essential services we use every day; it heats and cools our homes, transports people and goods across borders, and connects us through wireless towers. With its essential role in our economies, infrastructure provides investors with stable and growing cash flows, inflation protection and lower correlations with equity and debt sectors. As an added benefit of the asset class, we see long-term growth in infrastructure with the push toward decarbonization of the global economy.
Why infrastructure is a robust inflation hedge
Infrastructure has two main features that make it a robust inflation hedge, the first being its unique pricing mechanism.
In the case of regulated assets, including water, electricity and gas transmission and distribution, rising inflation will have little impact on valuations as inflation can be directly or indirectly passed through to customers. While regulations in different countries have various technical differences, in essence, regulation is designed to protect the return utilities receive for capital investment against macroeconomic changes, which include inflation.
Other infrastructure, like communications, typically have long-term contracts built within their pricing mechanism that include price escalation to account for changes in inflation.
Assets with concessions, contracts, tariffs, and tolls, also known as user-pay assets, also pass-through inflation because the control of prices is set in a contract agreed upon at the time of grant of the concession, with volume risk (such as traffic, passenger, and container) borne by the operator. Because of these features, heightened inflation has limited impact on infrastructure asset valuations.