2023: Setting sail for choppy waters

Firstly, a number of infrastructure sectors exhibit relatively steady demand and performance through economic and policy cycles. For example, social infrastructure sectors such as healthcare and education provide essential services often underpinned by strong regulatory support for operators. Additionally, adverse economic conditions tend to encourage allocations to true infrastructure assets, which exhibit higher pricing power owing to natural monopolies, or long-term contracted cashflows, resulting in high-profit margins even in slower growth environments.

Additionally, while inflation is expected to ease from the multi-decade highs of 2022, this is likely to be gradual, and inflation will likely remain above central bank targets into 2024 at least. As a result, the inflation insulation offered by infrastructure assets – many of which have revenues contractually linked to inflation – is also attractive to investors. 

Additionally, we consider that the increase in geopolitical risks is likely to serve as a continuing catalyst for the decentralisation of infrastructure, leading to a larger number of smaller infrastructure assets/projects. Of course, infrastructure is not without potential challenges in the year ahead.

Separate to the near-term benefits of infrastructure as an asset class, its investment horizon remains long term in nature, and secular trends will continue to shape opportunities in 2023.

The significant challenges to addressing climate change remain front of mind – in a recent industry survey every single infrastructure manager flagged decarbonisation as a primary driver for capital investment over the next decade. In addition to more established renewable energy sources such as wind and solar energy, green hydrogen energy delivery is emerging as an opportunity in this space, where there is likely to be an enormous need for investment over the coming years and decades.

Although the main channel for decarbonisation will be the transition to renewable energy, there are other ways in which this will be achieved. We see opportunities in areas such as green transport in Europe, where longer-term EU goals around emissions reductions will require a step change in transportation infrastructure. One example is the establishment of integrated green “corridors” for freight transportation with more environmentally friendly multimodal supply chains and the use of special hubs. Other examples include improvements to high-speed rail networks and the rollout of electric vehicle charging stations. Another segment with scope for growth is carbon capture and storage, with nascent infrastructure such as waste-to-energy facilities starting to garner government support. Finally, battery storage facilities have rapidly gained traction in a short period of time.

The investment outlook for 2023 is no doubt challenging. As the global economy goes through a bout of significant uncertainty, investors will have to navigate deftly a range of headwinds. Such conditions offer support for infrastructure given the class’s relatively higher inflation protection and lower GDP linkage.

And whilst 2023 will no doubt turn out to be an interesting year, ultimately, it is the long-term megatrends that will drive investment returns.  Infrastructure’s pivotal role in generating positive environmental and societal outcomes over periods measured in decades rather than years, undoubtedly offers cause for optimism.