September 09, 2024

Global listed infrastructure – structural changes in asset class create opportunities

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Authors
Overview
Topics
Research and Insights

Indrani De

Head of Global Investment Research

Lee Clements

Head of Applied Sustainable Investment, Global Investment Research

Henry Morrison-Jones

Manager, Global Investment Research

 Key takeaways:

Investment in infrastructure is a key driver of economic growth, productivity and social development. Private capital is increasingly being deployed to support the efforts of the public-sector and now represents 10% of infrastructure investment globally
With a deficit in infrastructure spending expected over the coming years the asset class seems poised to benefit from increasing allocations moving forward
FTSE Russell’s range of global listed infrastructure indices, which are underpinned by listed equities, offer a convenient and liquid way to address and analyse infrastructure markets
Having underperformed Developed over the last 10 years, the Emerging Core Infrastructure index has managed to outperform over the last 12 months, largely thanks to an outsized exposure to India
Prevailing demographic and economic trends in emerging markets and India make emerging markets infrastructure particularly interesting for investors and may end up being tailwinds for years to come

Points of differentiation:

Highlighting the structural changes driving the demand for private capital involvement in infrastructure
Profiling the use of listed infrastructure indices in addressing infrastructure investment
Analysing the recent performance of Emerging Core Infrastructure and highlighting the attractiveness of infrastructure in Emerging Markets

What does our research mean for investors? 

By reading this paper, investors will understand some of the key structural changes impacting the infrastructure investment market, particularly in the emerging markets. They will appreciate the ability to address this market using listed infrastructure indices.

Infrastructure is the bedrock of economic growth, productivity and social development.

Within developed market economies, the focus is not only on driving economic development, but also on replacing ageing infrastructure, while for emerging market economies, the focus extends to social reasons, such as improving access to healthcare or water supplies. Other key drivers of growth include the energy transition, re-shoring of manufacturing and increasing data infrastructure to accommodate growth in the digital economy and artificial intelligence. All these trends create a need for global infrastructure investment of $97trn by 2040.

Due to the importance of infrastructure, investment has traditionally been funded by governments; however it is increasingly becoming a key asset class for long-term, private investors as well. Currently, infrastructure investment stands at ~$3trn, or 3% of global GDP, however private capital is now responsible for ~10%.

From an investor perspective, infrastructure is often seen by market participants as a portfolio diversification tool, and as a hedge to long-term liabilities (asset-liability management) by offering exposure to potentially stable, inflation-linked returns.

The activities which can be deemed as infrastructure are broad and there is no single definition. However, the “core” infrastructure market is normally defined as owning, operating, managing and/or maintaining physical structures or networks used to process or move goods, services, information, people, energy and/or life essentials. It typically covers Transportation, Energy and Telecommunications. Infrastructure “related” activities are defined as those that involve the utilisation of infrastructure facilities without owning, operating, managing or maintaining them.

Transportation	Energy	Telecommunications
Roads, bridges and tunnels	Electricity generation, distribution and transmission	Fixed line, telephone and data networks
Ports	Water supply projects	Transmission lines or towers
Airports	Pipelines	Wireless transmission towers
Railways		Transmission satellites
Terminals and depots
Inland waterways

Despite being a smaller part of the global core infrastructure market, the emerging markets are particularly interesting given the large infrastructure gap and prevailing demographic and economic trends in the region being potential tailwinds in the years to come.

Emerging market GDP growth has outpaced developed markets, helped by structural reforms in countries like India, Brazil and Mexico, and supply chain shifts. Their excess growth relative to developed markets is forecast to widen further.

However, economic growth is held back by an infrastructure deficit across the region. There is an estimated $15 trillion deficit between infrastructure investment needs globally and current trends to 2040, roughly two thirds of which come from emerging markets.