Investing in infrastructure: a shifting megatrend

An infrastructure trend reversal

For a long time, economising has been the catchword when it comes to infrastructure in both the USA and Europe. Now, however, a lot of infrastructure is already considered outdated or worse for wear. In as early as 2016, the American Society of Civil Engineers forecast possible economic losses amounting to almost USD 4,000 billion in the decade ahead due to decaying and inadequate infrastructure. According to a study by the German Economic Institute (IW), four out of five companies in Germany believe that gaps in infrastructure have had a negative impact on their business activities, according to a study by the Institute of the German Economy (IW).

In the last few years, however, the trend has started to reverse. Some ambitious projects and programmes have been approved all over the world. Infrastructure is the focus of both the InvestEU Programme and the NextGenerationEU initiative – together, they are worth more than EUR 1.1 billion. China still has a long way to go in terms of modernisation and development and is pouring enormous sums from the state coffers into infrastructure measures. Meanwhile, in the USA, President Joe Biden signed off on an investment package in 2021 devoting over a billion US dollars to improving roads, bridges, energy, and digital networks. Vast amounts of money are being made available and many private companies operating in this sector could benefit from it.

Infrastructure is going green – and going digital

Infrastructure is often associated purely with “traditional” aspects such as roads, railway lines, or power lines – in other words, technical infrastructure. To keep up with our rapidly growing and evolving society, however, new dimensions like climate change, digitalisation, changes in mobility, and urbanisation are constantly being added to the mix. Fundamental changes are needed to make our infrastructure fit for our future life.

For example, power grids need to be modernised to ensure a successful energy transition. The conventional power infrastructure is designed for a central energy system based on fossil fuels. Electricity used to flow one way, from large power stations and through the grids to consumers. With a growing number of small photovoltaic systems and wind farms being integrated into the network, electricity is now flowing in all directions all the time. Renewable energy – like wind and solar power – is more volatile and less centralised, with consumers increasingly becoming producers too by installing solar panels on their roofs. To balance electricity supply and demand, power grids need to be smarter and more digitalised.

A complete rethink is called for when it comes to transporting and storing energy or managing electricity networks. Global data networks, self-driving vehicles, the Internet of Things, smart cities – all of this requires innovative solutions in terms of infrastructure. As well as being intelligent and digital, however, these modern solutions also have to be sustainable and climate-resilient. A great deal of new infrastructure is needed if the 17 United Nations Sustainable Development Goals are to be met. From clean water to sustainable communities, the Organisation for Economic Co-operation and Development (OECD) estimates that an annual investment volume of around seven billion US dollars is needed to make infrastructure environmentally friendly.

Characteristics of infrastructure investments

• The infrastructure sector is by nature highly diversified and has more facets to it than virtually any other. Water, transport, energy, and other segments such as education, health care, and telecommunications all fall under the infrastructure umbrella.

• -          There is always a need for infrastructure. It is essentially concerned with basic services and is relatively unaffected by the development of short-term market cycles. Demand for water and power supply, for the construction and maintenance of transport routes, and for telecommunications services is relatively constant.

• Many contracts between business enterprises are concluded on a long-term basis – over several years or even decades. They are also often linked to inflation (price adjustment clauses).

• The infrastructure sector often sees high capital requirements and territorial limits. As a result, the barriers to new players entering an existing market in the first place are often very high. Certain areas of infrastructure are therefore dominated by a select group of companies.

Risks of infrastructure investments

In addition to general uncertainties relating to business operations (e.g. management errors, unforeseen additional costs), there are specific risks involved in the infrastructure sector.

• Regulatory or legal framework conditions can fundamentally change business prospects.

• Politics is another factor that can create uncertainty. For instance, the government in a particular region may simply do a U-turn and decide not to implement a planned infrastructure project after all, possibly due to opposition from the local community.

• Forces of nature also pose a risk, as they can quickly inflict substantial damage to infrastructure in particular.

• Basic equity risks (e.g. increased price volatility, unfavourable exchange rate fluctuations) can never be excluded. Anyone investing in funds such as Raiffeisen-Infrastruktur-Aktien should be aware of these risks and bear them in mind.

• Investors in infrastructure should have an investment horizon spanning multiple years.

State: Juni 2023

The fund exhibits elevated volatility, meaning that unit prices can move significantly higher or lower in short periods of time, and it is not possible to rule out loss of capital.