We believe an asset that may tick many boxes and provide a firm base for investors in the current environment is infrastructure.
Real assets with inherently stable demand
Infrastructure assets have several structural features that tend to make them more resilient to prevailing economic and market conditions.
This resilience is largely due to infrastructure assets being inherently physical real assets – as opposed to financial assets – that usually provide critical services regardless of economic conditions. Examples of this include utilities, telecommunications towers, and natural gas pipelines – all indispensable to modern life, thus ensuring stable revenues.
Inflation protection
In addition to being in defensive sectors, the income streams from infrastructure assets often get additional security from being regulated or contracted for long periods, such as power purchase agreements or take-or-pay contracts.
Crucially, inflation-linked pricing is often expressly provisioned in such contracts, helping to protect the income from infrastructure assets from inflation. This is especially relevant in the current context of increasing trade tariffs, which could prove significantly inflationary by pushing up import costs.
Diversification benefits
From a portfolio perspective, a key source of resilience for infrastructure assets is their low correlation with other assets due to idiosyncratic factors. This results in improved portfolio diversification and enhanced portfolio efficiency, with increased expected returns relative to any given level of risk.
The same basic logic underlies the traditional 60/40 equity/bond portfolio concept. However, in recent decades, the correlation of bonds and equities has been increasing, thus further underscoring the potential diversification benefits of infrastructure assets.1
Enduring long-term growth drivers
It is worth remembering that global infrastructure spending growth is a megatrend widely supported and even prioritized by governments worldwide. Such policies are partly driven by demographic trends such as population growth and increasing urbanization, necessitating infrastructure spending to accommodate this. Beyond this, however, policymakers also increasingly recognize the capacity for infrastructure to be an economic growth-enabler and multiplier.
A good example is near-universal efforts to boost technology industries and digitalization, which necessarily requires considerable investments in fiber networks, 5G networks, and data centers.
Yet another major structural driver of global infrastructure spending is the drive towards cleaner energy. Trillions of dollars of investment will be needed across multiple key-emitting sectors to achieve the net-zero carbon targets that many governments and companies have committed to (Table 1).
Table 1. Projected investment needed by different sectors to achieve net-zero targets
Source: Systemiq analysis for the ETC (2023); BloombergNEF (2022), Counting Cash in Paris Aligned Pathways – analysis based on IEA Net Zero scenario. Note: Numbers may not sum to totals due to rounding.
Regarding performance
Infrastructure equities, as measured by the S&P Global Infrastructure Index, have significantly outperformed broader global equities over the long term as measured by the MSCI All-Countries World Index (Chart 1).3
Chart 1. Long-term performance: Global infrastructure equities vs. global equities
However, a well-known attraction of infrastructure assets is their safety benefit during increased market volatility (Chart 2).
Chart 2. Short-term performance: Global infrastructure equities vs. global equities
In the current period of volatility stemming from the global tariff conflict, infrastructure equities have (so far) again been exhibiting good resilience.
Final thoughts
In summary, infrastructure assets have several attractive features, including stable (often inflation-protected) revenues backed by physical assets in usually highly demand-inelastic sectors. In times of increased economic uncertainty and market volatility, we believe these features, the reliability of infrastructure asset revenues, tend to gain added value as a type of safe haven. As such, in the current environment of an escalating global trade conflict, which is a risk for both growth and inflation, we believe now could be an opportune time for investors to consider infrastructure equities.
1 Diversification does not ensure a profit or protect against a loss in a declining market.
2 "Overview and key findings." World Energy Investment 2024. International Energy Agency, June 2024. https://www.iea.org/reports/world-energy-investment-2024/overview-and-key-findings.
3 MSCI All Country World Index is considered a representative of stock markets of developed and emerging markets. The index is computed using the net return, which withholds applicable taxes for non‐resident investors.
Important information
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index.
Products investing in infrastructure are subject to the risk of concentrating investments in infrastructure-related companies, which makes them more susceptible to factors adversely affecting issuers within that industry than would a product investing in a more diversified portfolio of securities. These risks include high interest costs in connection with capital construction programs and the costs associated with environmental and other regulations.
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