The infrastructure industry saw stable performance but weak fundraising in 2023. But the longer-term outlook for infrastructure remains strong. Learn why.
2023 was an interesting year for private infrastructure. Inflation and rising interest rates intensified a valuation gap between buyers and sellers and froze many traditional credit markets. While performance remained resilient, the industry’s fundraising was at its weakest level in 10 years, with USD $89B raised year to date (Figure 1). Infrastructure deal activity was also significantly below that seen in recent years, with only $287B in global infrastructure transaction activity in 2023 compared to $417 billion in 2022 and $517 billion in 2021.1
Figure 1: Private Infrastructure Fundraising
Increasing earnings and strong fundamentals were not enough to keep infrastructure valuations from falling due to the rise in real yields; the asset class also underperformed the broader equity market. Real yields in the US rose most of the year, from 1.6% for the 10-year to 2.5% at its peak in October, resulting in a contraction in price/earnings multiples for utilities from 19x to 16x.2 Utility and wireless towers companies in the S&P 500® Index also sold off, creating a challenging environment for infrastructure portfolios built around these typically steady, defensive, and income-producing businesses.
This yield-driven volatility has been observed in the past. As seen in 2023, in 2018, infrastructure returns relative to equities declined as real bond yields increased (Figure 2). Nonetheless, as rates began to decline after October 2018, infrastructure returns outperformed the broader equity market.
As we start 2024, it is clear that investors continue to value infrastructure for its ability to provide inflation ‘hedged’ returns, alongside its diversification, income, and correlation benefits.
Figure 2: Infrastructure Performance versus Real Yields
Looking to 2024, the sector’s near-term performance may continue to be driven by investor sentiment and preferences. The past year has been dominated by the Magnificent Seven,3 but infrastructure should continue to add diversification to a portfolio — which we believe could generate some excess return potential over the longer term.
But if the economic picture weakens, investors could turn back to defensive stocks. Should market volatility return, investors may again seek the stability, durable cash flows, and dividends that utilities have historically provided. A decline in interest rates could also be a positive for utility stocks, as it would make the dividends they pay more attractive relative to bonds.
Infrastructure’s investment horizon remains long term in nature, and secular trends will continue to shape opportunities in 2024 and beyond. These long-term secular trends are expected to support infrastructure investment returns in the years ahead. While the sector — along with other defensive sectors — was not in favour with investors over the past year, that could change if 2024 sees a weakening of the economic picture.
Furthermore, after a year of sluggish performance, infrastructure has started 2024 trading at historically attractive valuations, given the growth prospects of infrastructure companies. Much of this growth is expected to be driven by the energy-generation transition from fossil fuels to renewables. A public policy tailwind is particularly prevalent in the US (following the Inflation Reduction Act or IRA) and Europe (following REPowerEU and the Green Deal Industrial Plan).
The SPDR Morningstar Multi-Asset Global Infrastructure UCITS ETF (MAGI) is an innovative investment strategy that aims to serve as a proxy for infrastructure. With over $2.0B4 in assets, the strategy seeks to offer greater liquidity with a proxy exposure to infrastructure.
The fund also provides multiple exposures to equities and bonds from different companies that are involved in the infrastructure business. It is well diversified both on the equity and the bond leg, with more than 500 stocks and 2,000 bonds.5 Thanks to the mix between bonds and equities, MAGI has performed better than many other pure-equity infrastructure ETFs. The fund has the potential to provide both regular income and capital appreciation. Thus, MAGI can serve different purposes: it can be used to efficiently implement a tactical asset allocation; a core allocation; or to gain temporary infrastructure exposure for committed but uncalled capital.