There are fewer super funds, and associations that represent them, than ever before. But multiple layers of industry representation working at cross-purposes means that true unity has remained elusive, according to the Financial Services Council.
The world’s largest sovereign wealth fund just made its largest return ever. But the probability of extreme market events has “arguably risen”, and it’s carrying out stress tests for a more uncertain future.
Biden bill a boon for listed infrastructure
It’s all coming up roses for the asset class, which is set to benefit from rising inflation and global spending programs.
A boom delayed is still a boom. The delta variant stymied reopening plans and the fiscal stimulus expected to accompany them, but listed infrastructure investors will breathe easier as government spending finally goes ahead.
“Our expectations for 2022 were what we had hoped to see in 2021,” Sarah Shaw, chief investment officer of 4D Infrastructure, told media on Tuesday (November 16). “That’s the huge global fiscal stimulus measures, initiated during the Covid pandemic, combined with what we see as quite accommodative central bank monetary policy, has led to strong global GDP growth. “
“And so even with revisions down, the IMF is still forecasting that the global economy will grow by 5.9 per cent in 2021, and 4.9 per cent in 2022.”
The key risk to that good news story is – as ever – inflation. Specifically the question of whether it’s transitory or not, an answer to which many are still trying to divine. For 4D, it’s transitory (despite recent supply chain disruptions raising the question of how long “transitory” actually is), and Shaw believes central banks will keep interest rates where they are for the “foreseeable future”.
Indeed, RBA Governor Philip Lowe recently said there was still a chance that the next rate rise would not come before 2024 (whether anybody believes him or not is another question entirely, and the RBA may still have its hand forced).
“Staying where we were are in the inflation is transitory (camp) – or even if it’s more of a problem than we currently anticipate – we still believe infrastructure is the place to be,” Shaw said. “Many infrastructure stocks have built-in inflation protection, either directly linked to tariffs or indirectly through their regulatory models.”
“Particularly the user-pays assets – toll roads, airports, ports and rails – are where you want to be invested in an inflationary environment. We are currently overweight user-pays assets, and that’s because they have a direct positive correlation with GDP growth through their volumes… as inflation or interest rates begin to increase over time, these protection mechanisms begin to kick in and positively impact earnings.”
4D also favours real regulatory return utilities, as they also have an inflation pass through without a “squeeze to their return profile” as a result of interest rates moving up. The other tailwind for the asset class is global stimulus measures, particularly the Biden Administration’s $1.2 trillion infrastructure program.
“This will represent the biggest burst of spending on US public works that we’ve seen in decades… the majority of this (spend) is public sector spending, and will provide a real opportunity for the listed operators,” Shaw said. “However, the Build Back Better bill, at $1.7 trillion – which will follow this bill – provides significant opportunities for the US utilities sector, which is largely listed, and something we’re very much looking forward to being able to capitalise on.”
India has also launched a US $1.35 trillion national infrastructure program that will also help to achieve the country’s climate goals, while the Australian Federal Budget saw an additional AU$15.2 billion for infrastructure over the next ten years.
“The IMF research has shown how this sort of spending has a real multiplier effect when it comes to job creation and economic growth,” Shaw said. “This type of infrastructure investment is going to benefit both the publicly-listed and private infrastructure sectors just in terms of that overall economic efficiency and enhancement of GDP growth.”
