While Mr Snelgrove expects interest rates to remain higher throughout the first half 2024, he expects central banks across the developed world to be cutting in the second half of the year given the recent cooling of inflation and a slowing global growth outlook. In the last month the market has started moving towards a similar expectation having started the year too optimistic on the quantum and pace of cuts.
“We feel the market may be too aggressive with over 150 basis points of cuts priced in at the end of December for the Federal Reserve, European Central Bank and Bank of England. Considering higher structural inflation and budget deficits, long bond rates should remain elevated, at more than 3.75 per cent to 4 per cent for 10-year Treasurys.
“Any official interest rate cuts, however, would support infrastructure assets, especially utilities. We expect interest rate cuts to start in the second half of the year and lower rates will support long duration infrastructure assets, which we forecast will continue to enjoy strong earnings growth, driven by multi-decade thematics,” said Mr Snelgrove.
4D Infrastructure notes five long-term growth dynamics that are completely immune to short-term events. Developed market replacement spend, global population growth, the emergence of the middle class, the energy transition and the rise of technology are all underpinning infrastructure investment, positioning it well for the long term.
According to Sarah Shaw, global portfolio manager and CIO of 4D Infrastructure: “Many developed nations need to replace old and inefficient infrastructure. Separately, robust global population growth in emerging nations is forcing up infrastructure spending. The emergence of middle classes too in developing economies like India and LatAm offers a huge opportunity with infrastructure, both as a driver and a first beneficiary of improved living standards.”
The transition to renewable energy is another tailwind for the infrastructure sector. “While the speed of ultimate decarbonisation remains unclear, there appears to be a real opportunity for multi-decade investment in infrastructure as every country moves towards a cleaner environment,” she said.
The rise of technology is also supporting rising investment in infrastructure. “The explosive growth in data consumption is fueling significant investment opportunities for infrastructure owners globally. Artificial intelligence and cloud computing, for example, demand huge infrastructure investment to support their growth.”
In terms of individual markets, Ms Shaw believes certain regions offer greater relative upside at present.
“We have started the year overweight in Europe and emerging markets. We also see opportunities in China given equities are trading at a historic valuation discount.
“Continued policy support remains the upside risk for China in 2024. While it’s hard to see a quick fix for China given the challenges facing the property sector, along with the trust sector and shadow bank issues, increasing savings rates and weak confidence, the market has priced this in and valuations look very cheap,” Ms Shaw said.
Robust travel momentum also remains a positive for infrastructure. “Travellers seem willing to give up other forms of discretionary spend amidst cost-of-living pressures in order to continue investing in travel and associated experiences. While we expect the pace to slow, we continue to position for solid travel demand into 2024,” she said.
Ms Shaw also sees a growing opportunity in the North American utility space.
“This sub-sector has been the most adversely impacted by the rate environment. As such a reversal in rate trend is expected to be a catalyst both in terms of fundamental earnings and market sentiment. We are watching this closely” said Ms Shaw.
Some short-term challenges, however, remain on the horizon. The ongoing Israel-Hamas and Russia-Ukraine wars, and the China-Taiwan conflict, could all impact markets in 2024.
“These continue to have potential impacts on agricultural and energy markets. The Israel conflict is set to become a bigger issue if it is not contained to Hamas, Gaza and Hezbollah. If Iran has any direct role, it could impact oil prices much more, both directly and via trade through the Strait of Hormuz which is already under heightened alert,” she said.
Separately, with so many elections around the globe in 2024 and rising populism, these are risks for economies and investors. “With elections, comes the rise of the populist rhetoric. From an economic perspective, the key issue is that populism leads to the development and attempted implementation of poor economic policy.
“We remain conscious of the volatile economic environment as well as the 2024 political overhangs, and we’re positioning accordingly. However, macro uncertainty and geopolitical tensions can also create unjustified market volatility and noise. We look to separate the resilience of the infrastructure asset class from this noise, and we remain optimistic about the long-term fundamentals underpinning the infrastructure investment case,” Ms Shaw said.
4D prioritises investment in infrastructure companies with strong leadership, defined strategic goals that integrate with a sustainability policy, strong balance sheets and those that are best-in-class within their sectors. “We believe that with active management, a listed infrastructure equity portfolio can be positioned to take advantage of the long-term structural opportunity, as well as whatever near-term cyclical events may prevail – whether they be environmental, political, economic or social,” Ms Shaw said.
The content contained in this article represents the opinions of the authors. The authors may hold either long or short positions in securities of various companies discussed in the article. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely as an avenue for the authors to express their personal views on investing and for the entertainment of the reader.