Are you a pragmatist, a sceptic, or a denier?

In the faraway days of August, after infrastructure posted a record H1 fundraising performance, we wondered how the asset class would fare under more hostile macro conditions, given the gathering storm.

Since August, we have had significant interest rate rises courtesy of the world’s leading central banks. And last week, thanks to the market’s fierce reaction to the UK government’s ‘mini-budget’, we got a front-row seat into how some investors might approach infra when market conditions are perceived as truly negative.

As often happens, the listed market was on the frontlines of investor reaction, with the infrastructure funds listed on the London Stock Exchange – mostly a mixture of renewables yieldcos and social infra plays – all experiencing significant sell offs following the budget announcement.

Part of that reaction just underlines how much listed infra correlates to wider market volatility. After all, virtually all of those listed funds fall under the much sought-after core bracket, containing assets with implicit or explicit inflation links. But another part is a reflection of discount rates, which are expected to rise on the back of soaring gilt yields and negatively impact valuations. Those movements are priced immediately in the listed markets.

On the unlisted side, adjustments don’t play out in quite the same way, of course. Some anecdotal probing revealed the case of a GP who called in the valuation advisers, only to have them decide against increasing discount rates just yet, partly because of a lack of transactions in the market with changed rates.

Make no mistake, discount rates will increase on the unlisted side too. But as we wrote in August, don’t expect them to do so in lockstep with rising interest rates. Also, as CBRE noted in a recent report, “discount rate is only one factor affecting valuations”. The amount of dry powder available in the market, for example, “might support transaction multiples even if interest rates continue to move higher”, CBRE added.

Pulling back from the trenches, one veteran industry professional argued there are three schools of thought forming as to how infra will perform in our new world: the pragmatists, the sceptics and the deniers.

The pragmatists are seeing a world where infra will face significant complexity, including higher inflation, geopolitical threats, climate change and technology risk. The sceptics are focusing mostly on inflation and believe the asset class will maintain its resilience if it settles at between 3 and 5 percent. If inflation stays above that range, they see some short-term challenges, but nothing insurmountable. The deniers argue that infra has proven its mettle in past crises and will endure no matter what.

We could see a scenario where the sceptics are proven right in the short to medium term – given the asset class’s momentum and assuming relatively benign inflation conditions – with many of the issues highlighted by the pragmatists capable of creating a difficult medium- to long-term investment environment if they aren’t dealt with efficiently.

In the end, it’s hard to make blanket assessments about the asset class. For all the investors put off by turmoil in the UK, it’s easy to see how attractive it might look for a dollar-denominated fund looking to pick up assets on the cheap. The same goes for a recession-hit Europe. And will Asian infra lose its appeal, given its strong growth fundamentals? Unlikely.

What is certain is that the Great Moderation – an era so benign it really should be renamed the Big Easy – is well and truly over now. We are in the early stages of a great repricing. Momentum, dry powder and strong fundamentals will only take a heterogenous asset class so far.