As Omicron extends uncertainty, infra remains a safe haven for investors

Allocations to infrastructure and real assets are expected to increase but it’s not just about protecting portfolios, Gresham House CEO Tony Dalwood argues.

The recent emergence of the Omicron covid-19 variant is creating uncertainty in the financial markets and concerns around a slowdown in the economy after a brief period of recovery earlier in the year. Many believed that high inflation was a transitory effect of emerging from the pandemic, yet it soared to record highs of 5.1 percent in November, leading the Bank of England to increase interest rates for the first time in three years from 0.1 percent to 0.25 percent. We are also seeing continued disruption to global supply chains which is affecting sectors across the economy such as retailers and manufacturers.

Investors will be looking for ways to protect their portfolios with assets that are uncorrelated to the equity markets, and an attractive area to consider is infrastructure. In the long term, real asset investments in infrastructure can help to reduce volatility in a portfolio and provide inflation-linked returns. They offer the potential for the ‘double bottom line’ of both long-term financial gains and ESG exposure. Despite this, infrastructure and real assets currently remain historically undervalued, and prices relative to financial assets, such as equities and bonds, are at their lowest in a century.

As a priority area of growth for the UK economy, infrastructure will be essential for building a more sustainable place to live for all. The necessary growth in investment into sustainable infrastructure include developing energy storage to make the move to renewable energy viable, protection of the environment and biodiversity, efficient land usage, strengthening our food supply and improving waste management. Tackling these issues will be critical for future generations.

The UK has already made significant investment to level-up cities and regions and has begun the shift towards decarbonisation of the economy with the launch of the green infrastructure spending plan last year and, in 2019, outlining its ambitious targets for a net-zero carbon economy by 2050.

There is more to be done, however. As the Intergovernmental Panel on Climate Change highlighted recently, we have less than 11 years to reduce emissions and prevent irreversible damage, creating an urgent need to invest in the infrastructure to support this transition to a low-carbon economy.

We have witnessed a rush to alternatives as investors become more focussed on the impacts of their investments and have sought to combat low yields coming from traditional fixed income assets. That rush also includes infrastructure, according to a survey Campbell Lutyens published in December. Of the more than 50 LPs surveyed, roughly 80 percent plan to increase their allocation to the asset class.

ESG-driven objectives

UK local authority pension funds are also showing increased interest in this area, and are particularly interested in the social benefits as they seek to achieve ESG-driven objectives for their members. We have seen growing demand from these in our own infrastructure funds and expect this trend to continue.

The UK is home to a host of entrepreneurial and innovative firms that are building infrastructure and offering sustainable solutions for the future. Funding is increasing as part of the government’s net-zero commitments and green infrastructure plans, but we will need to see increased capital from investors to allow them to scale and make a tangible difference. We expect the private markets to increasingly play a role in this and the International Energy Agency expects that 70 percent of funding will need to come from the private sector to drive the global transition to clean energy.

Despite the continued interest in sustainable investment and ESG, we expect increased scrutiny will be required across the industry to prevent greenwashing. Asset managers will need to provide more data, enhanced climate reporting and climate scenario analysis to back-up their investments to clients and ensure they understand the impact that their investments are making in the real world.

As the outcomes of the latest variant remain uncertain and the pandemic continues, we expect to see increased allocations to infrastructure and other areas of alternatives in the short-term to protect portfolios from any loss of confidence in the markets. It is important, however, that investors also consider the long-term value that infrastructure investment delivers, not just from a financial perspective but for the contribution it can make towards providing better lives and prospects for all.

Tony Dalwood is CEO of Gresham House.