Global listed infrastructure companies outperformed both global equities and bonds in 2022 — not surprising, given infrastructure tends to provide essential services, has strong pricing power, and often carries high barriers to entry and predictable cash flows. For these reasons, Peter Meany, head of global listed infrastructure at First Sentier Investors, believes the financial and economic factors contributing to this outperformance may remain in play in 2023. He predicts these factors, combined with the following five additional themes, could support certain pockets within the asset class.
- The Russia-Ukraine war and the pivot to LNG
The Russia-Ukraine war reinforced the importance of energy independence and security for many countries. With more than 40 percent of Europe’s gas coming from Russia, the invasion of Ukraine created an energy crisis. Commodity prices rose sharply as a result, and demand for alternative sources of LNG accelerated. U.S. infrastructure companies with LNG export facilities, such as U.S.-listed Cheniere Energy and Sempra Energy, outperformed in this environment. As a reliable and relatively cheap source of gas, new long-term contracts for U.S. LNG are likely in the coming years.
- Government support for infrastructure upgrades
Public policy support for infrastructure investment is likely to remain strong globally, especially where it relates to the replacement of aged infrastructure assets, the buildout of renewables to help decarbonize electricity generation and the globalization of natural-gas markets. First Sentier expects private-sector funding of new infrastructure investment to remain strong in 2023, with a slowing of M&A activity. A robust pipeline of capital investment opportunities for the vast majority of global listed infrastructure companies for the year ahead is likely.
- Decarbonization: the multi-decade growth opportunity
Investment opportunities from decarbonization, resiliency, safety, digitalization and electrification among utilities, in particular, are accelerating. These investments are driving an increase in the rate base growth of utilities globally, which in turn drives earnings growth. Within utilities, the firm is seeing an acceleration of solar and battery investments — especially in the United States, following the Inflation Reduction Act. First Sentier is also seeing an increased focus on the decarbonization of natural gas via RNG and hydrogen.
- The appetite for data
The outlook for cell towers and data centers remains positive, albeit rising interest rates may be more of a headwind to earnings per share growth than in previous years. In the United States, tower companies are benefiting from increased activity from telecom carriers deploying spectrum to support new 5G networks. The European tower market remains attractive, with multiple M&A opportunities through mobile phone operators selling their tower assets to independent tower companies. In 2023, First Sentier expects carriers and mobile network operators to continue the multi-year rollout of 5G mobile technology. With data centers, the firm expects enterprises to seek efficiencies in IT architectures through a combination of colocation and cloud services. The benefit of inflation-linked contracts will be especially evident in European towers.
- Return of the traveler
The transport sector was focused on volume recovery in 2022, with most toll roads returning towards 2019 levels of traffic, and airport activity up significantly as COVID restrictions eased. First Sentier expects the underlying recovery in demand to continue in 2023 but remains cautious of the economic headwinds globally. Global air traffic is expected to recover in 2024 to 2025, and business travel is likely to remain under pressure in 2023. In addition, the majority of toll road operators will benefit from inflation-linked toll escalators in 2023, with many developed market toll roads set for year-on-year increases in tolls of between 4 percent and 7 percent. This will be highly supportive for earnings growth.
“We believe global listed infrastructure remains well positioned as it enters 2023 with its well-known positive attributes of pricing power, structural growth and resilient cash flows intact,” said Meany. “Even if economic growth slows in 2023, the asset class is likely to still deliver highly attractive returns for investors.”