Global infrastructure should be a “particularly bright spot” given that historically the asset class has outperformed global stocks at the end of rate hikes, Clearbridge portfolio managers said.
According to managers, differentiated infrastructure returns also serve to provide diversification from “concentrated transaction risks” in 2025, given the dominance of the Magnificent Seven and more cyclical stocks in 2024.
“The concentrated market of 2024 and the return of inflationary pressures are a good reminder of what sets infrastructure apart from other asset classes and why we think it will be attractive in 2025,” Nick Langley, Shane Hurst and Charles Hamieh, Clearbridge global infrastructure portfolio managers. said in Infrastructure Outlook 2025: Closing the Valuation Gap.
The team noted that the market has yet to narrow the gap between infrastructure earnings and total returns since 2022, making valuations attractive for this reason.
“Even though there is a strong positive correlation between infrastructure earnings growth and total infrastructure returns, rising earnings and strong fundamentals have not yet fully offset the dislocation in valuations due to rising prices. real bond yields in 2023,” the report said.
“We expect this gap to narrow over time as the market recognizes strong long-term themes in infrastructure. »
Furthermore, the second Trump presidency is expected to create a more inflationary environment, meaning that the infrastructure inflation pass-through mechanism will likely be more valuable in 2025.
Clearbridge explained that the pass-through mechanism allows the prices paid by users of the asset to adjust periodically and ensures that returns for equity investors funding these assets are not eroded over time due to the effects of inflation.
“Importantly, this pass-through of inflation can take anywhere from three months to three years to impact reported earnings, depending on the type and location of assets,” the team said.
“As global central bank policy has eased, breadth has improved and the market has begun to recognize the strong fundamentals and secular themes of infrastructure,” said managers Nick Langley, Shane Hurst and Charles Hamieh. of Clearbridge’s global infrastructure portfolio.
These themes include decarbonization, increasing demand for energy from artificial intelligence (AI) and data growth, significant investments in networks to replace aging assets, realigned supply chains and reshoring trends .
The intersection of megatrends
Similarly, BlackRock believes that infrastructure as an asset class – like AI – will benefit from the “intersection of mega-forces” in 2025.
Key trends include the development of AI and a growing need for data centers, demand for new “green infrastructure”, aging populations in developed markets and increasing urbanization in emerging markets which are expected to rewire the chains global supply chains and help reshape infrastructure needs.
“We favor equity in infrastructure over a strategic horizon of five years and beyond as a potential beneficiary of mega-forces,” said Raj Rao, founding partner and COO of Global Infrastructure Partners, which is part from BlackRock, in the company’s global outlook for 2025.
Rao added that infrastructure investments, whose cash flows are often linked to inflation, can help protect portfolios against the expected rise in inflation over the medium term.
According to BlackRock, private markets will have a role to play in bridging the gap between required infrastructure and what governments and banks can finance on their own, although exposure to private markets will not suit all investors.
“With banks limiting lending, we believe businesses are likely to turn to capital markets, private lending and other non-traditional sources of credit,” Rao said.
“The divergence in how private markets have responded to rising interest rates has shaped our investment views over a strategic horizon of five years and beyond.
He noted that in private equity-like growth markets, private equity and real estate valuations have peaked after decades of falling financing costs. “This is why we have a relative preference for infrastructure-related stocks – such as airport and data center stakes – as we see fewer signs of high valuations,” he concluded.
