Infrastructure earnings better protected than global equities

Oksana Patron

14 December 2022

Despite valuations of underlying infrastructure assets remaining relatively unaffected by the looming recessions in the US, Europe and the UK next year, the impact of equity market volatility on the prices of listed infrastructure securities is expected to be more significant, according to ClearBridge Investments.

However, the portfolio managers, Charles Hamieh, Shane Hurst and Nick Langley, said they expected infrastructure earnings to be better protected compared to global equities in 2023 as most infrastructure companies already had a link to inflation in their revenue or returns, and regulated assets having their regulated allowed returns adjusted for changes in bond yields over time.

Additionally, the infrastructure would be benefit next year from several macro drivers, including energy security which would see more demand for energy infrastructure, given the situation in Europe where additional capacity would be needed to supplant Russian oil and gas supply and where the US in part would take a challenge to meet fresh demand from Europe.

Secondly, the next year would see more demand for new transport infrastructure due to adjustments to supply chains and calls for bringing production closer to home while airports would continue to struggle in their returns to pre-pandemic passenger levels due a to a combination of global recessions and changes in long-term trends in business travel.

On top of that, ClearBridge believed that communications infrastructure would continue to roll out 5G, develop 6G technology and work to reduce network latency, driving significant investments in wireless tower businesses, generally undertaken under long-term inflation-linked contracts.

Also, the growing need for electrification, as a result of the significant climate legislation in US history, the US Inflation Reduction Act (IRA), having been signed into law in August 2022, would require more substations, news transformers and upgraded wires along distribution networks.

On top of this, the plans of Biden’s administration to reduce emissions in the US by 50% by 2030, with roughly half of US power coming from solar plants by 2050, would require US$320 billion to be invested in electricity transmission infrastructure by 2030 in order to meet net zero by 2050.