Why change has been a constant for infrastructure investing
Jim Wright, Fund manager of the Premier Miton Global Infrastructure Income Fund highlights the key lessons from 2023 for infrastructure investors.
For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.
Vladimir Ilyich Ulyanov, better known by his alias ‘Lenin’, was reputed to have remarked that ‘There are decades where nothing happens; and there are weeks where decades happen’. Sometimes change is obvious – we knew as it happened that the shutdown of the Russian gas pipelines into Europe in 2022 would change the dynamics of the global gas market for a generation. Other times it is less perceptible, but ultimately equally impactful. So, it is worth pausing as we come to the end of another year to assess what we have learnt in 2023 as infrastructure investors. We present a brief list of ten lessons – some may be more important than others, but we are mindful of all in our investment decisions.
Demand for electricity in the US has started to grow significantly
Source: 1Bloomberg/ US Department of Energy, data from 31.12.1982 to 31.12.2021.2BloombergNEF (“BNEF”) data from 31.12.2022 to 31.12.2050. Forecasts are not reliable indicators of future returns.
After flat-lining for 15 years, demand for electricity in the US has started to grow significantly. The switch to electric vehicles and heat pumps, the onshoring of manufacturing and heavy industry and the growth in datacenter demand for energy driven by cloud and artificial intelligence solutions will all contribute to this growth. It is becoming clear that, unless politicians and regulators act, the major impediment to US economic growth over the next decade will be a shortage of reliable electricity generation.
Offshore wind is in trouble
Costs have risen, both in terms of the physical supply chain and the cost of capital for construction, and high-profile projects have been deferred or cancelled. Again, this is a test for policymakers – how important is offshore wind to a country or region, and are they prepared to mandate higher prices (and larger subsidies) get projects done?
Investors are learning to love nuclear power again
It is becoming increasingly clear that Germany’s decision a decade ago to abandon its nuclear fleet will be catastrophic for its economic growth, and those countries who have stuck with nuclear are looking at life extensions to preserve what is now perceived as reliable zero-carbon generation.
Electricity transmission infrastructure requires investment
There is a need for huge investment in electricity transmission infrastructure across the developed world. It is conceivable that we might see annualised double-digit growth in the asset base of transmission utilities in the UK, USA, Canada and Western Europe over the next decade. This is not what equity markets are pricing into these stocks.
We can’t just rely on inflation linkage
A lot of regulated assets have inflation linkage for revenues and profits, but this is not enough to offset negative equity market sentiment when interest rates rise.
There will not be a carbon tax in the USA
There are many reasons why renewable energy can and will continue to grow there, but this is off the table.
Capital flows will be important
There is a huge amount of capital chasing digital communications infrastructure. We do not believe share prices in the listed infrastructure sectors where companies own this infrastructure reflect this, and we would not be surprised to see significant corporate activity in the next 12 months.
New inter-state oil and gas pipeline projects
New inter-state oil and gas pipeline projects in the USA remain incredibly difficult to execute. Even after a huge federal push, the Mountain Valley Gas pipeline in the North-eastern USA has still not yet been commissioned. With demand for oil and gas robust, this makes the existing pipeline network hugely valuable.
Keep an eye on politicos
Beware politicians seeing infrastructure assets as a source of revenues. Not so much a new development, but reminders this year from French toll roads and Mexican airports that stable returns can be undermined by political interference.
Incidents of hurricanes, wildfires and flooding continue to grow
Infrastructure investment provides the answer, both in terms of investment in the energy transition to tackle climate change and investment in physical infrastructure to reduce the impact of extreme weather events.