With an anticipated second bout of inflation following the re-election of Donald Trump, infrastructure assets – due to their “pass-through mechanism” – are likely to attract investor attention in 2025, according to a fund manager.
Global infrastructure is expected to be a “particularly bright spot” given that historically, this asset class has outperformed global equities as rate hikes end, ClearBridge portfolio managers said.
According to the managers, infrastructure’s differentiated returns also serve to provide diversification from the “risks of concentrated trades” 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 believe this will be attractive in 2025,” ClearBridge global infrastructure portfolio managers Nick Langley, Shane Hurst, and Charles Hamieh said in the 2025 Infrastructure outlook: Bridging the valuation gap.
The team said that the market has yet to close the gap between infrastructure earnings and total returns since 2022, making valuations attractive for this reason.
“Even though there has been a strong positive correlation between infrastructure earnings growth and infrastructure total returns, increasing earnings and strong fundamentals have yet to fully offset the dislocation in valuations due to the rise in real bond yields in 2023,” it said.
“We expect this gap to close over time as the market recognises the strong long-term themes of infrastructure.”
Separately, the second Trump presidency is expected to bring a more inflationary environment, meaning that infrastructure’s inflation pass-through mechanism will likely be more valuable in 2025.
ClearBridge said that the pass-through mechanism allows prices paid by the users of the asset to adjust periodically and ensures that the returns to equity investors funding these assets are not eroded over time due to the effects of inflation.
“Importantly, this inflation pass-through can take anywhere from three months to three years to have an impact on reported earnings, depending on the type and location of the assets,” the team said.
“With global central banks easing policy, breadth has improved with the market beginning to recognise infrastructure’s strong fundamentals and secular themes.”
These themes include decarbonisation, growing power demand from artificial intelligence (AI) and data growth, significant network investments in replacing ageing assets, realigned supply chains, and onshoring 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 AI buildout and a growing need for data centres, demand for new-build “green infrastructure”, ageing populations in developed markets, and rising urbanisation in emerging markets that are expected to rewire global supply chains and help reshape infrastructure needs.
“We favour infrastructure equity on a strategic horizon of five years and longer as a potential beneficiary of mega forces,” said the Blackrock Investment Institute (BII), as part of the firm’s 2025 outlook.
BII added that infrastructure investments, with cash flows often tied to inflation, can help cushion portfolios against the higher inflation expected over the medium term.
According to BlackRock, private markets will have a role to play in bridging the gap between the required infrastructure and what governments and banks can finance alone, although exposure to private markets is not going to be suitable for all investors.
“With banks reining in lending, we think companies are likely to turn to the capital markets, private lending and other non-traditional sources of credit,” BII said.
“The divergence in how private markets have reacted to higher interest rates has shaped our investment views on a strategic horizon of five years and longer.”
BII noted that within equity-like growth private markets, private equity and real estate valuations have peaked after decades of falling financing costs.
“That’s why we have a relative preference for infrastructure equity – such as stakes in airports and data centres – as we see fewer signs of lofty valuations,” BII said.
