Prime Minister Mark Carney announces five major projects in Edmonton in September.AMBER BRACKEN/The Canadian Press
We admit it – “infrastructure” doesn’t typically generate the same type of excitement among investors that other areas might. For instance, “crypto” sounds mysterious and fun while “AI” feels cool and trendy.
Going long on infrastructure sounds the same as recommending “plastics” to someone in the 1960s – it’s boring and safe. However, branding issues aside, “boring and safe” is often a good thing in the world of investing. And we have two reasons why we still feel that investing in infrastructure will remain a compelling play in the years to come.
Trillions committed, but not yet spent
First, strong macroeconomic tailwinds are moving in its favour. In the developed world, aging infrastructure needs to be updated urgently. In the emerging world, many countries are experiencing massive demographic shifts and increasing urbanization.
In this year alone, several countries announced plans for major infrastructure initiatives. Here in Canada, the federal government plans on spending $115-billion on such investment over the next five years. This past March, the German government circumvented its long enshrined “debt brake” to create a fund that will spend €550-billion (roughly $885.6-billion) over the next 10 years on major transport, climate and digitalization projects. In Japan, it’s estimated that around 30 per cent of the government’s 21.5 trillion yen (roughly $187.2-billion) fiscal stimulus package will go toward public infrastructure projects. In each of these cases, it’s expected that private-sector participation will be encouraged given the amount of technological and operational experience that exists there.
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The future is shockingly electric
Second, there is a global push toward increased electrification. Already, we’re seeing signs that current digital infrastructure is inadequate to keep pace with the surge in power demand.
Whether it’s the push toward sourcing clean energy or the need for more data centres as part of the AI race, electrical grids are close to their peak loads in many places, while storage technology has lagged. That has created bottlenecks which, in turn, have meant an increase in electricity costs for the general public.
Infrastructure may not grab headlines like crypto or AI, but its role as the backbone of modern economies makes it indispensable. With governments worldwide committing unprecedented capital, the global shift toward electrification accelerating and the technological advances needed to keep pace with increasing demand, investors have a clear path to access stable, long duration revenue streams that are tied to inelastic demand. That can help augment portfolio diversification during periods of above normal inflation.
In a world where volatility often dominates headlines, “boring and safe” could prove to be one of the most compelling strategies for the years ahead.
Bipan Rai is managing director, head of ETF and alternatives strategy at BMO Global Asset Management.