Infrastructure: an effective inflation hedge?

However, higher interest rates which were put in place in order to contain inflation may have an impact on financing infrastructure investments. Despite UK inflation cooling down, the Bank of England has maintained the base interest rate at 5.25%. This can make financing for projects more expensive and less accessible as lenders will likely prioritise high-quality assets and experienced counterparties.

Rashid explains: “Infrastructure fundamentals have held up relatively well so far, but slowing growth is a potential risk to some cash flows, particularly gross domestic product-linked assets.

“Across the asset class [infrastructure] as a whole, we expect to see a divergence in performance between assets and strategies which can pass on inflation and have already secured low-interest costs, and those that cannot.

“In the current tough economic environment, demand for the best assets is likely to remain strong, with assets requiring a significant amount of work or capital likely to be repriced to lower levels.”

The appetite for investing in infrastructure should remain strong throughout 2024 and going into 2025, with the main reasons for this being that it offers predictable income streams and is supported by secular trends, Rashid explains.

Adding to this is the desire for pension assets to deliver positive social outcomes, Frith states: “There is a sense that investing in infrastructure can be a social good; providing an engine for growth for the economy, assisting in the energy transition and providing the new infrastructure that our communities and society crave. And at the same time producing an appropriate risk-adjusted return for the portfolio.

“I see, therefore, infrastructure remaining an attractive place to invest in today’s market.”

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