Outlook for the infrastructure sector

6 minute read

Philip Kent

CEO, Member of the Investment Committee

Phil Kent, adviser to GCP Infrastructure Investments Ltd, discusses infrastructure investment, emphasising the impact of high interest rates and inflation. A decline in rates could renew interest in infrastructure as a stable, long-term income source. Historically, infrastructure has provided inflation-linked returns, making the current inflation environment crucial. Infrastructure is capital-intensive, and cost efficiency is vital. A lower rate environment could reduce infrastructure costs and positively impact new developments. Hear more in the video below:

Outlook for the infrastructure sector

Below is a transcript of the video, modified for your reading pleasure. Please check the corresponding audio before quoting in print, as it may contain small errors.

What is the outlook for the sector over the next 6 months?

I think we're hopefully at the peak of the rate environment, and I think infrastructure has suffered during the period of higher rates. The fact that it was an alternative to fixed income, when fixed income wasn't delivering very much from traditional sources, bonds and gilts, meant that infrastructure was an attractive asset class as an alternative to that. During a higher rate environment on a relative basis, and that attractiveness has become less significant. So a reversal of that rate environment, we hope will lead people to relook at infrastructure as a long term, reliable source of predictable, stable income in portfolios. So I think the rate and macro environment is key to drive interest in infrastructure. I think the inflationary environment, I guess, linked to that is also one to watch. I think infrastructure has traditionally delivered inflation linked returns over the long term, and it generally has achieved that during the period of pretty high inflation over the last couple of years. So how the inflation environment changes, how that flows through to the economics of underlying projects, is also something to watch. I think, in general, the commitments that this country and others have made towards decarbonisation challenges like digitalisation aren't going away. And I would say that we haven't been investing sufficient amounts in new infrastructure in order to meet those challenges and that would be validated by comments made by entities such as the UK's Committee on climate change that point to significant underinvestment relative to the government's targets. I'd like to see that reverse. I hope the new government is a catalyst for that. I think critically, as part of that, there has to be an acceptance that new infrastructure is a capital intensive sector. Someone ultimately has to be responsible for paying for that and ultimately making sure it's delivered in the most cost efficient way possible across funding it, operating it, building it is going to be really important if we're, as we're about to embark on a significant capital investment programme across a number of different sectors. I think there's lots of challenges for the new government when they come in, but I think it's an exciting time to be investing in the sector.

Is infrastructure debt attractive today vs. other kinds of debt?

I think there's been a natural re rating of infrastructure debt. So infrastructure debt tends to be very long term fixed rate, or where it's invested in a project, it tends to be swapped at that project level. So the interest rate risk is minimal to the project itself. So during a period of higher rates on a relative basis, there has been a re rating in the infrastructure sector, and I think we've certainly seen that in the UK, listed space as well as over time, and lagged the private market valuations that we've seen as well. So on a relative basis, infrastructure has a job to do to reset itself. I think that creates some challenges, that being a very capital intensive sector, the funding costs are the key component of an infrastructure project. So the overall returns or the cost of provision of the infrastructure service is very sensitive to the rate environment. So I think a low end of the rate environment, and if indeed we are at the peak, as I think some suspect, that I think will have the dual impact of a re rating of infrastructure more generally as a long dated, relatively fixed rate investment, albeit with inflation linkage and some protection, particularly in the portfolios that we manage at Gravis. But also I think it will open up new infrastructure development in that it lowers the cost of that infrastructure provision, whether it's the effective energy cost or the effective cost of services that infrastructure will provide. Because of that high sensitivity to upfront capital investment.

Important Information

This article has been prepared by Gravis Capital Management Limited (the "Investment Adviser“ or “Gravis”) and is for information purposes only.

This article is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. Any recipients of this article outside the UK should inform themselves of and observe any applicable legal or regulatory requirements in their jurisdiction and are treated as having represented that they are able to receive this article without contravention of any law or regulation in the jurisdiction in which they reside or conduct business.​

This article should not be considered as a recommendation, invitation or inducement that any investor should subscribe for, dispose of or purchase any such securities or enter into any other transaction in the GCP Infrastructure Investments Ltd (the “Company”) or any other fund affiliated with Gravis.  The merits and suitability of any investment action in relation to securities should be considered carefully and involve, among other things, an assessment of the legal, tax, accounting, regulatory, financial, credit and other related aspects of such securities.​

No undertaking, representation, warranty or other assurance, express or implied, is made or given by or on behalf of the Company, the Investment Adviser or any of their respective directors, officers, partners, employees, agents or advisers or any other person as to the accuracy or completeness of the information or opinions contained in this article and no responsibility or liability is accepted by any of them for any such information or opinions or for any errors, omissions, misstatements, negligence or otherwise for any other communication written or otherwise. In addition, neither the Company or the Investment Adviser undertake any obligation to update or to correct any inaccuracies which may become apparent. The information in this article is subject to updating, completion, revision, further verification and amendment without notice.​

Past performance is no guarantee of future performance.

Gravis Capital Management Ltd is authorised and regulated by the Financial Conduct Authority. Its principal place of business is 24 Savile Row, London W1S 2ES.​

Newsletter

Keep up to-date

Select the funds you’d like to stay up to date with.

Loading...

Due to regulatory requirements, we are only able to share updates with professional investors in those jursidictions dictated in the terms and conditions for each fund. If you enter a personal email address into the form, it is likely that you will not recieve updates, so please, where possible, provide your work email. If you only have a personal email address but qualify as a Self-Certified Sophisticated Investor, or High Net Worth Investor, please get in touch with us directly, by emailing [email protected].

We only send emails when we have something to say. We'll never share your information. By submitting, you agree to Sparkpost's Privacy Policy and Terms. You can unsubscribe at any time.