It All Rests on Infrastructure

We see the asset class underpinning several key growth megatrends, but also the return of “big government” and its pursuit of security and protectionism.

Recently in this space, Multi-Asset CIO Erik Knutzen made the point that focusing on “structural economic and political trends” is more practical for investors than trying to untangle the implications of specific elections or geopolitical events.

Similarly, our Fixed Income Co-CIOs, Brad Tank and Ashok Bhatia, have argued that the destination for rates and inflation is more important than the journey. The journey may be stop-start and very bumpy, depending on what the latest macroeconomic data means for reactive, data-dependent central banks. The destination—lower than last year, but likely higher than the average of the past two decades—looks to us clearer and easier to act upon.

Focusing on structural trends rather than trying to second-guess the business, rates or political cycles doesn’t always simplify things, however. Many structural “megatrends” are being touted, from the clean-energy transition and fragmenting global supply chains, to the return of inflation and the Internet of Things, just to scratch the surface.

Is there some kind of overarching theme—or, even better, an investment opportunity—that brings them all together? We think there is: infrastructure.

Diversifying, Near-Shoring, Friend-Shoring and Re-Shoring

As the name suggests, infrastructure is the stuff sitting under every part of the economy, making it work: bridges, roads, tunnels, power grids, hospitals, schools, datacenters, ports. Whatever the great economic and investment themes of the next generation turn out to be, and however complex their nuances, without infrastructure they are not going to happen.

Let’s take a theme that stretched across both our Solving for 2023 and Solving for 2024 outlooks, but in slightly different forms. For 2023, the outlook came right out and called for “More De-Globalization,” focusing on how supply chains were being disrupted by geopolitical tensions and companies reassessing risk after the pandemic. This year, we thought governments would shift away from supporting consumers and toward what I called “fiscal spending directed at industry—and specifically security-related spending.”

Both themes help to explain why companies are diversifying, near-shoring, friend-shoring and re-shoring different parts of their global supply chains all at the same time—in pursuit of business resilience and in response to political risks and incentives.

As a result, ports and their supporting logistical infrastructure are undergoing huge change. As customs borders harden and tariffs are raised and applied more widely, focus is growing on investments in the technology and capacity of ports to process goods more efficiently and cost-effectively. And as near- and friend-shoring reshapes trade routes, some ports and their supporting infrastructure will need to be upgraded.

Re-shoring—an increasingly clear objective across much of the political spectrum, as Erik observed—often means more than simply building new domestic manufacturing facilities. Those facilities may themselves require additional power, logistics and transport infrastructure to be viable and efficient. And for that infrastructure to be environmentally sustainable, we believe investment will be required to shift power provision toward natural gas and renewables and to accelerate the electrification of domestic transport and logistics.

Megatrends

These examples indicate how infrastructure investment ties together a range of different megatrends: deglobalization, rising political and geopolitical risk, the return of manufacturing to developed economies, the energy transition, the electrification of the economy. This has implications for investment risk: If one megatrend falters or fades, support from the others remains.

Similarly, let’s take a new potential megatrend that many public-equity market investors missed out on over the past year: artificial intelligence (AI).

For those who have not been overweight in AI-related stocks, the likelihood that the benefits of AI will spread through non-tech sectors may offer some solace. However, for those who were already invested in telecommunication infrastructure and datacenters—to get exposure to the next-generation connectivity, next-generation mobility, Internet of Things, Big Data, robotics and automation themes—the emergence of AI is just another source of growth to add to the list.

Security, Resilience and Protectionism

In short, infrastructure has provided the essential building blocks of an industrial economy for 200 years, but is also exposed to the most notable investment themes of our age.

It can be defensive, often taking the form of essential real assets with regulated and inflation-linked cash flows. It can be aggressively growth-oriented, in the form of new and enhanced assets built to support dynamic economic megatrends. It can even be both simultaneously: We live in a moment when utilities are emerging as a vital enabler of the latest developments in technology.

But perhaps most importantly, in our view, infrastructure in almost all its forms is positively exposed to one of the key political and economic themes of our time: the return of big, free-spending, interventionist government in pursuit of security, resilience and protectionism. To limit the economic friction this implies, substantial public and private investment in new and enhanced infrastructure is a strategic necessity.