Infrastructure to benefit from “solid foundations” amid rocky markets

New commentary from boutique listed infrastructure specialist, 4D Infrastructure, has allayed concerns over the impact of economic uncertainty and Donald Trump’s tariffs on infrastructure investments.

Sarah Shaw, Global Portfolio Manager and CIO at 4D Infrastructure, said that while the imposed tariffs are set to upend global markets and the economy, infrastructure investments do have the benefit of a “solid foundation”.

“So far in 2025, we see a moderating growth, inflation and rate outlook, with Trump 2.0 as the main wildcard for markets. For the US, while Trump’s core policies are pro-growth there is now a greater degree of uncertainty, bigger downside risk and a wider range of possible economic outcomes,” Shaw said.

“Trump’s main campaign policies and threats are known, that is, tariffs, taxes, immigration and deregulation. However, as we’ve seen in the past week regarding tariffs, the degree of implementation and timings remain fluid.

“Medium term, these initiatives could see a scenario of higher nominal US growth, elevated inflation, and favourable domestic drivers for corporate earnings, but tempered by the potential downside risks from global trade tensions and geopolitical instability.

“These headline tariffs, if implemented as suggested, could have a stagflationary impact on the US economy, leading to lower growth and higher inflation at the same time.

“However, there is a very wide range of potential outcomes. Tariffs are a tax on imports, which will slow economic activity as demand slows. Firms may pass on tariff-related expenses to the end consumer, resulting in a kick-up in inflation.

“This will add to geopolitical uncertainty. Tariffs are likely to be used as weapons of foreign policy, and the level of retaliatory tariffs could also have significant economic and geopolitical consequences. These have the risk of flowing through to renewed supply chain disruptions, which could bring upside risk to inflation globally.”

Shaw said infrastructure companies have the support of long-term fundamentals which the investment manager is looking to capitalise on, including developed market replacement spending, population growth, the rise of the middle class in developing economies, the clean energy transition and rise of technology.

“With market and economic trends currently diverging, certain regions offer greater relative value at present, and we are positioning for this. With the risk and opportunity of Trump incorporated into forecasts, we start 2025 overweight Europe and emerging markets with selective positioning in the US awaiting greater clarity. Overall, infrastructure remains an attractive asset class for investors, given its unique characteristics such as inflation pass-through, resilient earnings and exposure to long-term growth,” Shaw said.

“We will be monitoring regional economics and politics closely and positioning ourselves to best weather these at an in-country level.”

“European and UK utility investment plans look particularly attractive as they are supported by strong sector growth thematics. European user pays also continue to offer value. While volume growth is mitigating, it remains solid, and the strong cash generation and growing shareholder returns are attractive in the current muted economic environment.

“We also remain selective in our exposure to China, capitalising on those names that can benefit from any stimulus as well as a slowly recovering sentiment. In Latin America, Mexico is at risk of Trump 2.0 and we are limiting exposure to those names that have low exposure to tariffs, can capitalise on a weakening currency and are not on the radar of the new Mexican government, namely the airport space. 

“In Brazil, growth and inflation expectations surprised to the upside in 2024 and the reversal of the rate trajectory to a tightening territory amid fiscal policy concerns had a significant impact on sentiment for the infrastructure names. As a result, 2024 was a very weak year for Brazilian infrastructure equities which is at a complete disconnect with fundamentals – they all have an inflation hedge and many a GDP link which were both very supportive.

“Elsewhere around the globe we continue to monitor geopolitical risk and opportunity, the economic outlook as well as capitalise on long term, structural growth thematics that underpin the infrastructure investment story.”