To most investors, infrastructure is viewed as a defensive asset class with characteristics that support long-term, visible and resilient earning streams. However, it offers much more than a defensive allocation. What many investors do not appreciate is the huge and growing investment need underpinning the asset class. This growth makes infrastructure a really exciting opportunity.
Infrastructure may well be the best fundamental growth thematic for the next twenty to thirty years, if not longer.
There are five integrated dynamics driving growth in the infrastructure space that are long term, significant, and completely immune to short-term economic or geopolitical events. That is, they must happen regardless of who is running America, regardless of the interest rate trajectory around the world, and regardless of equity market noise.
Some of these themes may seem obvious, and even boring. But, put simply, if we don’t support investment in them, then society will go backwards. Socially, economically and environmentally.
1. Developed market replacement spend
A significant portion of infrastructure in the developed world is in dire need of replacement. It is old and inefficient, and failures to upgrade it is having social and economic consequences in terms of health, safety and efficiency. For example, in the UK, over 50% of London's watermains are over 100 years old.
In the US, the average age of a bridge is over 45 years old and 75,000 are past their ‘useful life’, including the recently collapsed Baltimore Bridge. Also in the US, 80% of water pipes are over 30 years old and some are over 100 years old – there are still towns being serviced by 100-year-old wooden pipes.
The market replacement of all these ‘essential services’ is a multi-decade investment thematic, and Australia is not immune. For example, the train from Sydney to Newcastle is currently slower than it was in 1929, and the distance is shorter.
2. Population growth
The global population currently sits at just over 8 billion, while some of the infrastructure we are still using today was built to service less than a quarter of that. The world's population is expected to peak at 10.4 billion by around 2084, underpinning yet more spend to replace the old while investing to support future generations.
As the developed world gets older, the majority of the growth will come from the emerging world, where 85% of the global population currently reside and where demographic trends are very supportive of economic evolution and infrastructure investment.
3. The emergence of the middle class in developing economies
The emergence of the middle class in developing economies offers huge opportunity for the sector, as infrastructure is both a driver and a first beneficiary of middle-class evolution.
It should come as no surprise that people everywhere want a better life and, given the potential size of the middle class in emerging markets, this will have significant implications for infrastructure needs both in country and globally (e.g. airports). Let's look at it from an individual’s perspective.
As personal wealth increases, consumption patterns inevitably change. This starts with a desire for three meals a day and moves to a demand for basic essential services – like clean water, indoor plumbing, gas for cooking/heating, and power – that all require infrastructure.
With power comes demand for a fridge or a TV, which increases the usage as well as the need for port capacity and logistics chains. Over time, this progresses to include services that support efficiency and a better quality of life, such as travel, with an increasing demand for quality roads (to drive that new scooter and then car on) and airports (to expand horizons).
Infrastructure is the clear and early winner of this growth in the middle class, as it is needed to support the evolution outlined above.
4. Energy transition and decarbonisation
The world has accepted the challenge of working towards a cleaner, sustainable future. While the speed of ultimate decarbonisation remains unclear, there appears to be a real opportunity for multi-decade investment in infrastructure as every country moves towards a cleaner environment.
Energy transition and decarbonisation of the power sector is an obvious thematic and will have the greatest impact on countries looking for Net Zero. However, it is not just the energy sector. Other forms of infrastructure - namely transportation and technology - also have a key role to play.
There will be no Net Zero without significant new infrastructure spend. Importantly, there will also be no Net Zero if the emerging world is not involved in the goal, with over 50% of investment needs in these economies and growing.
5. Technology
The rapid growth in AI and particularly GenAI has resulted in a seismic shift in the outlook for the electricity industry.
Data centres consume huge amounts of electricity and for the technology to be a success, it is essential that it is powered by secure base load, green supply and supported by continuous data bandwidth. Incredible amounts of infrastructure investment are required across communication towers, green generation and most importantly in networks to support the load growth.
Not only are these five themes important individually, but they are also interrelated in ways that can cause disaster if they are not managed correctly.
A prime example is the collapse of the Baltimore bridge last year. The bridge collapsed because it was past its useful life or, in other words, because it was old and needed to be replaced. But the ship hit the bridge because it was under automation, and it briefly lost power. That single incident encompasses the three themes of replacement, technology and the energy transition.
Infrastructure also offers truly global exposure with assets across developed Asia, Europe and North America as well as emerging markets. This allows investors to capitalise on in-country economic cycles and gain exposure to domestic demand and investment thematics as they evolve.
With active management, an infrastructure portfolio can be positioned to take advantage of the long-term structural opportunity set discussed above, as well as whatever cyclical events the future throws at us whether they be economic, political or environmental. As long as people need transport, power and technology, I can think of no more compelling or enduring global investment thematic for the coming 30 years.
Sarah Shaw is CIO and global portfolio manager at 4D Infrastructure. This article provides general information only and does not consider the circumstances of any individual.