Capitalising on infrastructure’s renaissance
When considering sector strategy, seeking long-term tailwinds which prevail over short-term uncertainties is important. Outperformance of a benchmark over time is not typically determined by the choice of one stock over another within the same sector or investment style, but rather by focusing on the right sectors, assets and regions and then seeing volatility as an opportunity – particularly when sentiment trails the fundamentals.
The healthcare sector is an example – where the political and policy headwinds are now dissipating and the long-term drivers such as ageing populations, strong innovation and the growing affluence of Asia are once again reasserting themselves, while sentiment remains distracted. The infrastructure sector globally offers a similar example where robust tailwinds are gathering pace while valuations are listless.
The fundamentals
It is fair to say that, certainly in the West, most infrastructure was built in the decades following WW2 and this is now approaching obsolescence. Much of the world’s power grid is nearly 50 years old and over half of US grid transformers are 30 years old. The power outage in Spain in April 2025 is one example of the existing system not coping. It is fair to say that our systems across the infrastructure spectrum are under growing strain.
Infrastructure globally now requires significant investment to keep pace with GDP growth and the transition to electrification, and to meet sustainable development goals. Otherwise, economic growth will suffer. John Pettigrew, the former Chief Executive of National Grid, recently suggested the UK needs to build seven times as much infrastructure in the next few years as it has over the last 30.
For example, the current system will not cope with the huge surge in electricity demand expected from the giant data centres supplying Artificial Intelligence (AI). Indeed, earlier this year it was estimated the backlog for demand for this single industry was around 50GW, which is more than the current total peak demand for the British grid. Yet this is not just a British phenomenon.
Forecasts from the International Energy Agency suggest electricity demand globally will grow 3.7% this year (the average since 2015 being 2.6%) and at least 4% a year thereafter. Data centres and AI presently account for less than 5% of demand in the US, but this is expected to grow to 12% by 2030. Meanwhile, global electric vehicle sales this year are expected to grow by c.20% and total 25 million – c.30% of total sales.
And while renewable energy and nuclear power will assist, they cannot cater over the next two decades for electricity’s share of total global energy increasing from c.25% to 40% and the expected doubling of the global power grid. This is why fossil fuels need to remain in the mix. The existing power grid – which not so long ago relied on coal – cannot cope with the expected demands and challenges of the modern economy.
However, the need for a major upgrade goes beyond the power grids. In addition to much needed investment in transportation infrastructure globally, water is now not only becoming a resource of growing importance generally but is central to the AI rollout – for data centres require huge amounts for cooling. The sector also requires a shake-up and step-change in investment given the extent of leakage and pollution of rivers.
In this country, the sector has started a five-year £100 billion investment programme which is twice the amount spent in the previous five years. A single body will replace both the Environment Agency and Ofwat to secure long-term results. 25-year delivery plans are being introduced to provide pension funds and other investors with the certainty they need by equating the life expectancy of the sector’s assets with investment timelines.
Investment opportunities
Readers may question why valuations are not yet reflecting the investment opportunities. Could it be that, with government debt levels already too high and bond markets nervous, there is scepticism as to how can this investment can be funded? The answer lies with the private sector, courtesy of a regulatory regime and policy environment which is becoming increasingly accommodating if not supportive.
The penny has dropped in the corridors of power that the underfunding can be corrected by incentivising investment to make returns more attractive. This is in part because of the sheer scale of investment required with some estimates suggesting that, without the necessary investment, there will be a looming $4 trillion infrastructure funding gap by 2040. But the penny has not dropped with retail investors – yet.
The good news is the energy transition is at an early stage. Recent figures suggest that, when looking back over the last decade, the valuations of listed infrastructure companies stand at a meaningful discount to both their average and to comparable private assets. For example, the S&P Global Infrastructure index stands near the bottom of its historical range over the last decade relative to the wider market. Investors have not missed the boat.
And private equity knows it. The sector specialists are paying significant premiums for listed infrastructure assets. Last year CDPQ, the largest institutional investor in infrastructure, paid $10 billion for Innergex – representing a 58% premium to its close, and 80% premium to its 30-day average price. And the sector’s powder is not running dry, for private equity fundraising is at a near record high and this will help sustain the sector’s tailwinds.
Our portfolios have been adding to positions – most sector exposure consists of International Public Partnerships (INPP) and HICL Infrastructure Company (HICL). These stocks manage physical assets and have been considered by the market as bond proxies offering a high yield, growing dividends and lowish volatility.
As such, they have typically assisted portfolios by way of income and/or diversification. Yet the gradual but discernible strategic shift in government policy, together with recent company announcements suggesting more of an emphasis on the sector’s growth opportunities, should make for a rerating as the tailwinds gather force.
The more growth-orientated portfolios also hold trusts which focus on listed electric and gas utility companies and those managing environmental services, and transport infrastructure including ports, roads and airports. These include Utilico Emerging Markets (UEM) and Ecofin Global Utilities & Infrastructure (EGL) which invests in companies largely outside the emerging markets.
All should benefit as sentiment catches up with the improving fundamentals.
Disclaimer: The information contained in this article does not constitute investment advice or a personal recommendation, and it is not an invitation or inducement to engage in investment activity. You should seek independent financial advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.
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