The pandemic continues to create ripple effects across the global economy. No growth in 2020, rapid growth in 2021, slow growth in 2022. Looking to 2023 with a base case of recession in the United States, Europe and the United Kingdom, and growth in China should be below trend for at least a good portion. of 2023.
But what are the growth drivers for infrastructure in 2023, and how have recent macro drivers created tailwinds for the asset class?
macro driver
On top of its relative appeal versus equities, infrastructure should benefit from several macro drivers in 2023 and beyond. First, energy security is driving policy globally, and achieving energy security will require building a significant amount of infrastructure.
Supply constraints brought on by high gas prices and the Russia/Ukraine war highlight the importance of energy security and energy investment. It supports energy infrastructure, particularly in Europe, where additional capacity is needed to replace Russian oil and gas supplies, and in the United States, where new basins are being opened up, partly from Europe. To meet the current demand.
Market impact on infrastructure
Bond yields are likely to move higher in 2023 before leveling off along with inflation later in the year. For equities, contracting multiples driven by higher bond yields characterized the first part of this bear market.
The second phase of bear markets is typically a slowdown in earnings, this is expected to be especially a force in early 2023. However, the impact on infrastructure should be muted, especially for regulated assets, where companies derive their cash flows, earnings and dividends from their underlying asset bases.
Those asset bases are expected to grow over the next several years. As a result, infrastructure earnings look better protected than global equities.
Utilities look set to perform well
Inflation is correlated to the revenue or returns of most infrastructure companies. Regulated assets, such as utilities, have their regulated allowed returns adjusted for changes in bond yields over time. As real yields rise, utilities look poised to outperform.
As a result, changes in inflation and bond yields generally do not affect the underlying valuation of infrastructure assets. However, we have observed that equity market volatility associated with higher bond yields tends to affect the prices of listed infrastructure securities, making them more compelling than unlisted infrastructure valuations in private markets.
demand for new transport infrastructure
In transportation, adjustments in supply chains to change trade routes and bring production closer to home, either through reshoring or near-shoring, are driving demand for new transportation infrastructure. Airports are still struggling to return to pre-pandemic passenger levels, and that is likely to be hampered by a global recession in 2023.
In addition, the industry is experiencing changes in long-term trends such as business travel. Communications infrastructure continues to roll out 5G, develop 6G technology, and work to reduce network latency, driving significant investments in wireless tower businesses, which are typically associated with long-term inflation. carried out under contracts. However, in the short term, higher interest costs are affecting the bottom line.
IRA industry will be transformative
In terms of fiscal policy, the US Inflation Reduction Act (IRA), signed into law in August 2022, is one of the most important pieces of climate legislation in US history. This has the potential to be industry-changing, especially for utilities and renewables.
The growing need for electrification—including more electric vehicle charging infrastructure and more residential and small commercial rooftop solar—will require new substations, new transformers and upgraded wiring along the distribution network.
We are already seeing its impact in utilities’ 2023 capital expenditure plans, with forward order books of companies involved in the energy transition – such as renewables, storage and components suppliers – increasing their growth profiles.
One key macro takeaway from the IRA: There’s no reason to build anything except renewables from now on. main reason? tax credits. Production tax credits for solar/wind are available until 2032 or until a 75% reduction in greenhouse gases is achieved (based on 2022 numbers). Either way, it’s expected to be a favorable wind for investing for more than a decade.
Secular growth drivers for infrastructure should be on full display in 2023. US President Joe Biden wants to reduce emissions in the United States by 50% by 2030, with about half of US energy coming from solar plants by 2050.
Going net zero by 2050 would require approximately US$320 billion to be invested in electricity transmission infrastructure by 2030.
Infrastructure spending is desperately needed for the next decade and beyond, and the first steps are being taken to meet these long-term goals.
Charles Hamieh is managing director and portfolio manager at Clearbridge Investments, which is part of Franklin Templeton
