The International Monetary Fund (IMF) has recommended that governments invest in infrastructure spending as a response to the Covid-19 pandemic. A report by the multilateral institution noted that “in the long term, public investment in infrastructure can help reduce inequality by fostering structural transformation, which also facilitates regional convergence between rural and urban areas in low-income economies”.
Some governments have been following these steps.
Indonesia is set to launch a new sovereign wealth fund in the coming weeks after the government passed an Omnibus Law. The new state-backed fund is intended to help the country attract infrastructure investment and to start with IDR75 trillion ($5 billion) in initial capital.
Andries Hoekema, global head of insurance segment at HSBC Global Asset Management told AsianInvestor earlier this month that Asian insurers, in particular, have been keen to invest in infrastructure debt and private debt strategies since the start of Covid-19 crisis.
In Canada, one of the largest public pension funds, Ontario Municipal Employees’ Retirement System (Omers), is also planning to invest in infrastructure in new markets in Asia and may as much as double its allocation to such assets in the region by 2025.
“Our aspiration is to have up to 15% of the infrastructure portfolio in Asia Pacific, as our overall global portfolio continues to grow,” Ralph Berg, global head of infrastructure at Omers, told AsianInvestor. Asia Pacific only accounts for about 8%, or $1 billion, of the global allocation at present.
Given the rising interest in such assets, AsianInvestor canvassed views from seven experts about how those infrastructure opportunities could lead to more active funding across the region.
The following contributions have been edited for clarity and brevity.
Shawn Khazzam, head of Asia Pacific alternative solutions
JP Morgan Asset Management
As a relatively new asset class, infrastructure has proved itself over the last decade, establishing a strong track record that highlights its potential to enhance returns and mitigate risk as part of a broader portfolio.
The focus for many institutional investors has been on core investment strategies, which can produce stable, forecastable cash flows through the use of prudent leverage and some combination of transparent and consistent regulatory environments, long-term contracts with credible counterparties, and mature demand profiles.
Looking into uncertainty ahead in 2021, these characteristics, including also low correlation to other asset classes, will have a role in portfolios. We think that private core infrastructure will continue to be a way for investors to generate income, diversify portfolios and hedge against inflation in 2021.
Because infrastructure investments are physical assets, they have an inherently local component. Utilities have defined service areas, while power plants and transportation assets have tangible footprints. As a result, infrastructure investments depend on investors’ relationships with local regulators, customers and communities.
Through close attention to ESG principles, infrastructure investors not only encourage sustainable development but can also bolster their own financial performance.
Jim Lydotes, portfolio manager for global infrastructure income strategy
We believe the asset class is poised to recover along with broader global equities as we continue to see the gradual reopening of the global economy. Rising Covid-19 cases have been a challenge as improvements in employment trends have now moderated and stabilised somewhat.
Many parts of the infrastructure sector are, in fact, better positioned on the other side of the Covid-19 crisis than they were heading into it, yet equities have lagged the broader market recovery. As this dynamic becomes better appreciated by equity investors, we see a positive setup headed into the end of the year and into next year.
The utility sector comprises close to half of the infrastructure sector, and the fundamentals for these businesses are as strong as they have ever been. With governments across Europe looking to offset unemployment effects brought about by the Covid crisis, accelerating green energy build-out is a logical way to do this.
We’ve already seen tangible signs of European governments and regulators looking to clear the path to accelerate some of this planned build-out, and we think this is a very underappreciated growth option embedded across many European utilities.
Jonathan Tse, managing director covering Asia Pacific infrastructure
We continue to see significant opportunities for capital to be deployed across the capital structure in the Asia Pacific infrastructure sector in 2021 and beyond.
Fundamentally, key macroeconomic and demographic drivers in Asia Pacific remain, despite Covid-19 and the political situation in the US. Accounting for roughly half of the world’s population, Asia Pacific is in a sweet spot – still enjoying a rising middle class, sustained urbanisation, and increasing demand for infrastructure.
Looking forward, the key areas of particular focus (and indeed where we have seen the bulk of recent private capital flows) are expected to be in clean energy, digital infrastructure, environmental and healthcare sub-sectors. Additionally, there has been, and continues to be, a convergence between infrastructure and green opportunities, which are able to leverage technology to enhance the digital infrastructure offering.
Andrew Kwok, Asia head of private infrastructure
Covid-19 has validated and reinforced our approach to underwriting, which focuses on principal protection from underpinning contracts, tangible value creation that is not dependent on macroeconomic or market dynamics, manageable levels of leverage, and an assumed reversion to normalised levels of exit valuation metrics.
In terms of sectors, we maintain our focus on above-average growth segments that benefit from transformative trends, such as clean energy and a more digitised world. Within these segments, we seek out assets with true infrastructure characteristics: hard assets and strong businesses with long-term contracted cash flows and high barriers to entry.
We expect that valuations for these quality assets will continue to be elevated and there will be no cheap buys, even in a post-Covid-19 world. Similarly, we remain focused on value creation via our three strategies: platform expansion, building core and operational value creation.
Glenn Fox, head of infrastructure debt investments
HSBC Global Asset Management
We see opportunities across the global infrastructure debt market. The investment grade market continues to offer life insurers opportunities to invest in long-term assets with stable cash flows, better structuring and higher yields than equivalently rated public fixed income.
These assets are ideal for matching long-term liabilities. Most of our activity is in the US, but we also see interesting investments in Australia, Asia, Latin America and the Middle East.
The high yield infrastructure debt market offers an alternative to corporate private debt at this time of global economic disruption, offering many of the defensive characteristics of investment grade strategies, albeit with higher risk commensurate with the higher yields.
Sustainable infrastructure will continue to be a big theme in 2021 as the world continues to focus on a lower carbon generation future. Telecommunications is likely to replace transport as a key sector in response to travel disruption and working from home.
Alex Araujo, fund manager, global equities
Politicians are only too aware that investment in public services is popular, particularly in an election year. Given the parlous state of the global economy since the onset of the Covid-19 pandemic, fiscal policy is particularly significant this year.
Higher spending on infrastructure has been a key feature of fiscal stimulus packages in Europe, China and Japan, but it has been notably lacking in the US – ironically, the country that probably needs it most.
The fact that Donald Trump has been unable to implement a much-needed infrastructure plan during his presidency has been a source of frustration for both sides. Higher infrastructure spending in the US provides a potential tailwind across the spectrum of infrastructure sectors.
That said, the attractions of the asset class do not hinge on US infrastructure programmes coming to fruition. Renewable energy, clean transportation, digital connectivity, water and waste management, social and demographic shifts are all enduring structural trends.
Frank Kwok, Head of Asia Pacific
Macquarie Infrastructure and Real Assets
2020 has been a year like no other, with the Covid-19 pandemic affecting different infrastructure sectors in different ways. The current environment has accelerated some of the megatrends that were already driving the infrastructure buildout in the Asia Pacific region.
One of these is the rise of digitisation. As an example, nowhere have we seen the rapid growth of data usage more than in China, which has the world’s largest internet user base, with strong traffic growth driven by the proliferation of online applications and the coming rollout of 5G technologies. This is creating opportunities in digital infrastructure, such as data centres.
Not all sectors have been positively affected of course, and one of the key lessons – and therefore opportunities – we see for investors is to focus on diversification, by both sector and geography.
We will be watching with interest to see how government policy in response to the pandemic may impact the infrastructure sector, in the immediate and longer term. We’re already seeing governments around the world looking at infrastructure spending as a way to kick-start their economies.
Article updated to fully reflect job title of Jim Lydotes of BNY Mellon.