Deputy chief investment officer of equities, head of the global equity income team and portfolio manager at Newton Investment Management, part of BNY Mellon Investment Management – in Boston. Joined Newton in 2021.
In our view, themes—which identify the ‘micro’ and ‘macro’ shifts across industries and economies with the potential to shape the market landscape—are important to watch, as they can drive long-term value for investors. Some themes are inherently difficult to forecast, while others afford investors a greater degree of conviction. Some more uncertain thematic questions may include whether humans could ever colonize Mars, if drones could be used to deliver weekly groceries to our homes, and if we could we see cures for diseases such as Alzheimer’s or diabetes in our lifetimes. All these are possibilities and exciting notions to consider, yet the feasibility and timelines of each are also invariably uncertain.
On the other hand, some thematic opportunities can offer a level of dependability. In this economic environment, we think that investing in trends captured by these themes may become an essential tailwind for portfolios. We believe the infrastructure sector has exposure to themes with a greater sense of transparency, such as the aging baby boomer demographic and the energy transition, that can provide a level of security in these uncertain times.
The aging demographic of the baby boomers
In the United States, approximately 10,000 people turn 65 each day. These are members of a cohort dubbed the baby boomer generation, born after World War II and between the years 1946 and 1964. In 2023, the oldest baby boomer is set to turn 77 years old, entering a phase during which alternative housing, which can be more conducive to the lifestyle of an older adult, often becomes desirable.1
As this key demographic continues to age and the world recovers from the Covid-19 pandemic, our society may need more social infrastructure to support its increasing demands. Aged-care facilities, senior housing options and greater hospital capacity should invariably be necessary, and investors could benefit from this expected growth. The health care real estate investment trust (REIT) market has long been a core focus, and we expect the health care REIT segment to remain an area for opportunity in 2023.
Governments and organizations worldwide are working toward decarbonization, investing capital in strategies designed to reduce greenhouse-gas emissions. The global energy transition—the continuing movement to replace fossil fuels with renewable energy sources—is a firmly established trend today. As government initiatives and regulations continue to support net-zero objectives, regulated utilities may need to convert their generation fleets to more sustainable sources. This process could drive regulated utilities to grow more rapidly than ever. Faster-rate base growth should lead to faster earnings growth and, likewise, faster dividend growth. These trends are as evident to us as the global push toward a lower-carbon future.
We believe these two themes—the aging demographic and the energy transition—should have the greatest effect on the global listed infrastructure sector as we head into 2023.
Inflationary pressures drove the investment narrative in 2022, and we expect these pressures to continue as we head into next year. The cost of living in much of the world has vastly increased, incentivizing governments to accelerate their plans to decarbonize and transition to renewable-energy sources. With the continuation of energy supply restraints and the continuing war between Russia and Ukraine, the notion of committing capital to renewable-energy solutions has become increasingly desirable. Nowhere is the energy cost-of-living crisis greater, and the political motivation to hasten renewable-energy growth stronger, than in Europe. This is where we continue to see the greatest opportunity for value creation in 2023. Inflation affects the infrastructure sector to an even greater extent than the global energy transition. With the cost of everything from utility bills to cans of soda increasing, most businesses are looking to pass on their own pricing pressures to their customers through higher prices for their goods and services. In some scenarios, consumers may simply accept higher prices, but in others they may not, and these higher end prices could erode business profitability. What the 2023 consumer will be willing to absorb is still uncertain, as the full cost of a winter heating season has yet to hit the consumer balance sheet.
Most infrastructure businesses—including, but not limited to, energy pipelines, toll roads, aged-care facilities and tower businesses—are governed by long-term contracts with built-in inflation pass-through mechanisms. These businesses, which provide essential, non-discretionary services, have the predetermined ability to periodically measure and then mechanically pass through inflationary pressures to their end consumers. In an uncertain economic environment with elevated inflation rates, the infrastructure asset class can offer investors a degree of transparency and stability through established long-term contracts.
Over the last 30 years, globalization had allowed much of the developed world to import deflation. However, the current trend of deglobalization is likely to have the opposite effect. We expect the inflation narrative to remain a prominent focus in 2023. In this environment, we expect the infrastructure sector to continue to be much more insulated than other segments of the equity markets.
How private infrastructure can influence listed infrastructure
The backdrop for private infrastructure investing can often have considerable implications for the listed infrastructure space.
The size of the private infrastructure space in 2007 was approximately $100 billion. That figure has grown 10-fold over the last 15 years, and today, private infrastructure assets have reached over $1 trillion. Moreover, year to date, 2022 has already produced more fundraising for unlisted infrastructure than any full year since recordkeeping began.2
Most North American institutions typically earmark 5% of their portfolios for infrastructure investments; today, however, only about 2% of that capital is actively allocated. Likewise, approximately one third of the $1 trillion currently committed to private infrastructure funds is effectively on standby, and commonly dubbed “dry powder” (i.e., cash reserves and other liquid assets ready and waiting for suitable investment opportunities). Notably, half of that “dry powder” was raised in the last two years.
With so much money continuing to pour into the private infrastructure space, and so much of that funding yet to be drawn, we see 2023 emerging as a year of activity acceleration. We believe that this should directly benefit asset owners of listed infrastructure equity. We have already begun to see the effects on the listed infrastructure market, as private equity investors have utilized some of this capital to acquire listed infrastructure companies, in part or in full. We expect this trend to continue into 2023.
The multiples at which assets are trading hands in the private market remain at an all-time high versus listed-equity peers. We believe this trend should support more of this activity, with private “dry powder” drawn to acquire assets, either fully or partially, in the listed-equity space.
To illustrate the scale of “dry powder” in the private infrastructure space, consider the following: at the end of 2021, there was a total of $319 billion in “dry powder” waiting to be drawn for the right investment opportunities. There are currently 74 listed equities in the global infrastructure index. If all that “dry powder” was invested at once, it could be used to acquire 48 of those 74 companies overnight, at a 25% premium to closing prices on September 30 of this year. While this is undoubtedly an unlikely scenario, it demonstrates the supportive role that the private “dry powder” on hand could have in the listed infrastructure sector. When acquisition multiples increase, market conditions generally favor sellers over buyers, and listed-equity companies by and large are the sellers in this market.
Heading into 2023, we believe it is an opportune time to invest in listed infrastructure equities. These business models demonstrated their resiliency amid an inflationary and economically uncertain environment in 2022. If economic stagflation continues into next year, we think the backdrop for defensive businesses—particularly those exposed to themes such as the aging demographic and the energy transition and with valuations supported by private infrastructure capital—should remain constructive. Conditions in 2022 set the stage for investor opportunities in the infrastructure space, and we believe that these opportunities should continue into the new year.
1United States Census Bureau. (2019, December 10). 2020 Census Will Help Policymakers Prepare for the Incoming Wave of Aging Boomers. Accessed November 20, 2022.
2Preqin Ltd. Accessed November 20, 2022.
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