Infrastructure assets continue to benefit from inflation-linked revenues

Oksana Patron

25 August 2023

Infrastructure assets are expected to continue to benefit from inflation-linked revenues as falling inflation still remains high and tight monetary policies and slowing growth will persist, according to ClearBridge Investments.

At the same time, listed infrastructure will still offer more liquidity and flexibility compared to unlisted infrastructure assets as it provides investors with a better opportunity to optimise their portfolios not only in terms of sectors, regions and market cap spectrum but also offers choice of underlying asset risk exposure or opportunistic use of market mispricing.

ClearBridge’s portfolio manager, Shane Hurst, stressed that particularly in the context of falling but still high inflation, tight monetary policies and slowing growth, infrastructure benefited from having resilient, inflation-linked revenues.

“Due to the essential nature of infrastructure assets, demand is relatively stable, providing lower volatility than traditional equities and resilience of infrastructure revenue during various business cycles,” he said.

“Even at times of economic weakness, consumers continue to use water, electricity and gas, drive cars on toll roads and use other essential infrastructure services. Many infrastructure companies have regulation or contracts linked to inflation.

“As a result, infrastructure companies’ financial performances benefit from inflation with a lag of a few months to a few years.”

According to him, a longer term outlook for the infrastructure assets will look even brighter given a number of tailwinds such as decarbonisation, the industry transformative global policy support, and subsidies towards renewables.

“A major takeaway from the global policy support for an energy transition is that there is no reason to build anything other than renewables from now on due to subsidies available and that greater opportunities now exist within our universe as coal-exposed utility companies accelerate their net zero plans,” Hurst noted.

On top of that, changing trade routes and shortening supply chains will bring production ‘closer to home’ through either reshoring or near-shoring driving a higher demand for new transport infrastructure and power infrastructure.