Jim Wright, Fund manager of the Premier Miton Global Infrastructure Income Fund looks at why, without reliable electricity supply and investment in high-speed data networks, advances in AI and cloud data simply can’t happen.
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.
The prospects for infrastructure as an asset class
The recent announcement that Blackrock is paying $12.5bn for Global Infrastructure Partners (GIP), one of the world’s biggest independent infrastructure asset managers, is a timely reminder that infrastructure is an asset class which has incredibly strong prospects over the years and decades ahead. We believe that there will be increased institutional allocations to infrastructure going forward, and that Blackrock is positioning its business to take advantage of this trend. These large institutional allocations will predominantly focus on private infrastructure funds, but we see the opportunity for the listed space as very clear. Some of the new capital deployed will be invested in assets already in private hands, but we believe that deploying sizeable new investor capital will inevitably lead to both purchases of assets from, and full takeovers of, listed infrastructure companies.
What happened in 2023?
After the tepid performance of the listed infrastructure sector in 2023 on the back of interest rate concerns, valuations across many sub-sectors are attractive in our view, as many companies have seen their stock price fall despite growing earnings and dividends. Acquisitions will not only boost the wider multiples of these companies and assets, they will also remind the market that these stocks are more than simply bond proxies.
Our largest position in the Premier Miton Global Infrastructure Income Fund, and our biggest differentiator to our listed competitors, remains in North American regulated utilities and generation stocks. With a few exceptions, this did not work in 2023. The explanation is depressingly simple – the sell-off in these stocks was driven by sentiment around rising interest rates. This is true for utilities and renewables globally, but the relative underperformance was particularly acute in the US, where the regulated utility sector recorded its worst performance relative to the wider market in fifty years.
So, what happens now?
Firstly, the sector is helped by the fact that interest rates are no longer rising. After recent US CPI data it is maybe premature to say that US rate cuts are imminent, but at least the pressure on sentiment has abated. However, while flat or falling rates are helpful, they are not the core of our positive thesis on US electricity stocks.
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.
Increasingly we believe that while generalists are looking backwards at 15 years of flat electricity demand in the US, they are ignoring the growth prospects going forward. Electrification and the onshoring of heavy industry and manufacturing in the US will quite clearly drive increased energy demand, at a time when huge investment in transmission, distribution and generation are needed simply to stand still, as coal-fired plants are retired. Therefore, acceleration of investment in electricity generation is required, in renewables such as wind and solar, as well as natural gas to provide demand at times when renewables can’t meet the load requirements of the grid. In addition, we believe the US will see growth in transmission investment, to get the electricity to where it is needed, in distribution grids, and in energy storage solutions.
The AI effect
A further source of demand which we believe is under-estimated will come from datacenter usage of electricity for cloud storage and artificial intelligence (AI) servers, to power the processors and to provide 24-hour air conditioning. Datacenters have improved their energy efficiency and power usage effectiveness, but the Graphics processing units (GPUs) which enable AI are widely described as “power-hungry hardware.” We have looked closely at this area, and discussed the potential quantum of demand growth with companies and with analysts on this and the conclusion is – no-one knows how big this demand will be, only that it has the potential to be very significant.
The emerging and growing trends in AI and cloud storage also underpin our investments in stocks which own high-speed data infrastructure. In addition to reliable energy, a further pre-requisite for these technologies to function and to grow is access to robust high-speed fixed and mobile data networks. Again, we believe that equity market investors are looking backwards at years of underperformance, rather than opening their minds to the opportunities for the owners of telecommunications infrastructure. Listen to Deutsche Telekom or BT, or Softbank Corp (the mobile network) in Japan talk about opportunities for AI to increase returns on capital, both for themselves and their business customers – it is mind-blowing!