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A brave new dawn for European infrastructure investment?

Until now, infrastructure investment across Europe hadn’t recovered from the 2008/2009 Global Financial Crisis and sat at a 15-year low of 1.6% of GDP in 2019, according to European Investment Bank data.

The fiscal stimulus across Europe promises to direct significant capital towards new infrastructure. But can private investors reap the benefits?

There can be little doubt that infrastructure is likely to be an area of significant activity over the next few years.

Fiscal stimulus packages have included significant infrastructure investment with capital directed towards projects that help the EU get closer to its target of net zero carbon emissions by 2050.

The European Commission’s Green Deal promises to mobilise €1trn for projects such as the renovation of buildings and infrastructure, the roll-out out of renewable energy projects plus cleaner transport and logistics.

Digital infrastructure is also likely to be priority as covid-19 has re-engineered the workplace.

Forging ahead

The private sector is likely to play an important role. In this respect, southern Europe has already led the way.

With straightened government finances, Spain has long had to rely on the private sector to fund infrastructure development and it is home to some of the most sophisticated infrastructure companies in Europe – Ferrovial, which owns Heathrow and ACS, which owns German construction group Hochtief, for example.

Spanish financial institutions have also led on a number of other projects, including Crossrail in London and the Sydney Light Rail system.

The investor demand should be there as well.

At a time when interest rates are negative across much of Europe, investors are hungry for yield.

Infrastructure, with its stable cash flows and high, inflation-adjusted income, is a natural home for capital moving out of bonds but unwilling to take the risk on equity.

Already on the bandwagon

Fund groups have taken advantage of this potential demand with a slew of launches.

The Digital Infrastructure and Connectivity Ucits ETF, sponsored by Quikro, launched this week on the HANetf platform, investing in data centres, digital connectivity, data networks and digital services and intellectual property.

On 14 October, Triple Point Energy Efficiency Infrastructure Company (TEEC) announced it had raised £100m.

iShares Smart City Infrastructure Ucits ETF (CITY) launched in March. Vontobel Asset Management launched a global infrastructure fund in August.

So far so good, but have infrastructure asset done as promised during the pandemic, delivering stable capital returns and dividends?

Mixed picture

Some areas have undoubtedly been defensive, but others – such as airlines and ports – have suffered as economic activity has sunk.

The fund manager for the M&G Global Listed Infrastructure fund, Alex Aruajo, admits that transportation assets have come under pressure. “It looked like they should be defensive because everyone travels even in a recession, but that wasn’t the case.”

The MSCI World infrastructure index has dropped 8.12% for the year to date, which puts it significantly behind the MSCI World index, which is up 2.12%.

Active funds that can cherry-pick assets have performed better. The M&G fund, for example, is only down 3.4% for the year to date, while the LF Miton Global Infrastructure Income fund is down 3.0%.

In general, says Aruajo, dividends have held up well.

“It’s been a very narrow leadership in the market and; although we have Apple and Amazon as customers in our data centres, so we are participating in their growth; it is difficult to keep pace with those stocks in a strategy such as this one. As such, we’ve underperformed in a rising market.”

However, he says that as markets have become more wobbly, the characteristics of infrastructure investment have come to the fore and infrastructure investment has outperformed in the recent market volatility.

Too dull?

Aruajo believes that the market has left many infrastructure stocks behind, seeing them as boring and defensive.

“We don’t see them that way at all. Many of the businesses we look at in this area have an exciting story around them with their contribution to the energy transition, investing in renewables and more sustainable forms of energy generation.”

He has bought six new holdings this year, all in the area of energy transition. This has come at the expense of areas such as airports and energy infrastructure.

That said, investors may do better targeting niche areas of the infrastructure market and there are now plenty of options for them to do so.

Renewables infrastructure is a big market, particularly wind and particularly in Spain. The country’s transmission system operator, Red Electrica de Espana (REE),  commissioned 6,456 MW of renewable energy capacity in 2019, compared to 330 MW the year before. It is likely to see a tailwind from EU stimulus. Digital infrastructure is also likely to see a boost.

A final specialist area worth considering is European logistics.

This aims to tap into the increasing demand for warehousing as Europe’s ecommerce market expands. Aberdeen Standard and Tritax have funds specialising in this area. Evert Castelein, manager of the Aberdeen Standard European Logistics Income, believes that the restructuring of supply chains closer to the point of distribution should also increase demand for European logistics warehouse space.

Infrastructure investment looks set to be an exciting area of investment over the next few years as government money comes through and investor interest rises.

However, the pandemic has shown that there can be areas of weakness.

The smart capital may move to higher growth areas, such as digital infrastructure, renewables and logistics.

Part of the Mark Allen Group.