4D Infrastructure chief investment officer, Sarah Shaw, says inflation will be a key issue in this market but there is also great opportunity presented by the huge global infrastructure investment plans as part of stimulus programs taking place globally in the wake of COVID-19, as well as decarbonisation and its implications for infrastructure investment.
“The huge global fiscal stimulus measures initiated during the COVID pandemic, combined with very accommodative Central Bank monetary policy, has led to a surge in global GDP growth.
“The key risk to this story is of course inflation, and the current debate revolves around whether inflation is ‘transitory’ or not. However, whether inflation is transitory or more of a problem than we currently anticipate, infrastructure is still the place to be. Many infrastructure stocks have built-in inflation protection, either directly linked to tariffs or indirectly through their regulatory construct. Essentially, infrastructure, and in particular the ‘user pay’ sub-sector of infrastructure, is where you want to be invested in an inflationary environment.
“But a far more exciting issue for us at present, as it will ultimately have a significant impact on the shape of our asset class, is that the global economy is poised to ramp up infrastructure spending.
“The US Senate passed a US$1.2 trillion infrastructure plan (US$550 billion in new federal investment) that will represent the biggest burst of spending on US public works in decades. Similarly, India will launch a 100 trillion rupee (US$1.35 trillion) national infrastructure plan that will help generate jobs and expand use of cleaner fuels to achieve the country's climate goals. The EU has also announced significant infrastructure investment plans, while the May 2021 Australian Federal Budget saw the Commonwealth Treasurer identify an additional A$15.2 billion investment over 10 years on major infrastructure projects, and kept the 10-year plan at A$110 billion.
“IMF research has shown this type of infrastructure spending has a real ‘multiplier’ effect when it comes to job creation and economic growth.”
Ms Shaw says the other key global area of focus is climate change and decarbonisation.
“Simply put, the world cannot achieve Net Zero carbon by 2050 unless there is a huge investment in the infrastructure solution. Decarbonisation only enhances the infrastructure investment opportunity.
“While the speed of ultimate decarbonisation remains unclear, there appears to be a real opportunity for multi-decade investment as every country moves towards a cleaner environment. Energy transition and decarbonisation of the power sector is an obvious thematic, and will have the greatest impact on countries looking for Net Zero. However, other forms of infrastructure, namely transportation, also have a key role to play,” she says.
Quay Global Investors principal and portfolio manager, Chris Bedingfield, agrees the past 18 months in markets have been challenging, but that government policy settings globally also provide some good opportunities.
“While there are pockets of overvaluation in the global real estate market, there are also tremendous pockets of deep value and opportunity.
“Global real estate has had a good run over the past 12 months and is up nearly 40 per cent in that time.
Demand has come rushing back very quickly in terms of the stimulus that was put in consumers’ hands over many months, and we’ve seen that in logistics, self-storage and retail – really right across the board.
“In terms of where we see opportunities, one of the results of COVID-19 has been a renewed interest in some global real estate sectors that many had written off.
“Take bricks and mortar retail as an example. You couldn’t get investors interested in shopping centres before COVID-19. Most people were death writing the whole industry thinking that ecommerce was going to take over the whole world.
“But what we’ve seen in the United States is a resurgence in bricks and mortar retail. The largest retail landlord in the world, Simon Property Group, just reported its third quarter sales performance – and the sales from the third quarter are higher in 2021 versus 2019 by roughly 7-8 per cent. And that is despite the fact that in the US they had rolling shutdowns.
“We were starting to see the same sort of trend here in Australia with Scentre Group until the Delta strain came. So we fully expect consumers to come roaring back – not only in terms of ecommerce sales, but bricks and mortar sales as well.
“We see that as an incredibly good opportunity,” Mr Bedingfield says.
Bennelong Funds Management CEO, Craig Bingham, adds that some of the euphoric behaviour we are seeing in global investment markets at the moment is not likely to be sustainable.
“It’s important to focus on investors’ needs for the future. We know that history does tend to repeat itself, and it pays to bring a healthy dose of scepticism to the table when it comes to the outcome for global markets.
“We’ve seen a lot of digital businesses evolving and coming to the fore with valuations that defy gravity. But we know we need real assets such as roads, bridges, airports, railways and real property – we can’t ignore the opportunities that exist in infrastructure and real estate.
“Six years ago we took the decision that our clients needed exposure to global opportunities such as listed infrastructure and listed real estate, and it was a decision that has paid off. Quay and 4D have produced some stellar numbers and have had some good results. They are showing some great momentum because they are investing today for investors’ needs into the future,” says Mr Bingham.
