21 Sep Investing in Infrastructure
By Jean Strock, AFA
The World Economic Forum estimates that there is a global spending deficit of USD1 trillion per year (and growing) on basic infrastructure such as power, water, transport and communications. This applies to both developed and emerging economies.
India is one country that needs a massive upgrade of its infrastructure and it could pick up the demand for hard commodities where China left off. Indian Railway Minister Suresh Prabhu recently announced a project to redevelop 400 railway stations and associated land.
Even the USA is behind in infrastructure spending. The American Society of Civil Engineers releases a report card on the state of the countries’ infrastructure assets every four years. Currently they score a D+ average with dams, aviation, levees, wastewater and hazardous waste scoring the lowest. http://www.infrastructurereportcard.org/
The collapse of the I-35W bridge in Minneapolis in 2007 highlighted the issue of aging infrastructure in the US.
With governments reluctant to take on more debt post GFC, more investment from private sources will be required to fund what are often large, capital intensive projects.
As an asset class Infrastructure investment has many benefits for investors, adding a defensive tilt to the portfolio.
Infrastructure investments tend to be of lower risk. They are less susceptible to market cycles as the use of water, power and roading for example is fairly stable. They are characterised by large up-front capital investment followed by a very long period of regulated cash flows paying a premium over inflation.
Investing via a specialist, actively managed fund can mitigate some of the risks of infrastructure investment such as asset specific risks (technical or construction issues) political or financing risks.
For most investors a 3-5% allocation to Global Infrastructure will add a defensive asset class and further diversification into an area sorely in need of investment.