Europe in the slow lane

Infrastructure investors are pondering the implications of a persistently low-growth environment.

“Europe keeps praying for growth, testing people’s patience”. This was the headline of an article on Forbes.com, reporting on the European Commission’s cuts to growth forecasts for this year and next year for the European Union and euro area.

The European Central Bank has repeatedly wielded stimulus measures as it seeks to spark the region’s dormant economies to life. Nothing so far seems to have worked. And, as one participant at Infrastructure Investor’s recent European Fund Management roundtable noted, it seems increasingly that policy makers are “out of options”.

With the odds on an eventual deflationary environment becoming shorter by the month, growth – or lack of it – is unsurprisingly a talking point among Europe’s infrastructure investors. The instinctive reaction to this is to wonder what precisely there is to worry about – after all, the infrastructure asset class has thus far tended to perform well overall through up and down cycles.

And it’s true that not all the outcomes of a low (or negative) growth environment are unfavourable ones. For example, there is some evidence that corporates (many of them boasting significant cash piles) as well as institutional investors and sovereign wealth funds, are increasingly shifting their resources to emerging markets in a hunt for growth that goes beyond their traditional stamping grounds. This could serve to lessen competition for assets in the developed European markets they are leaving behind.

On the other hand, some conclude that a mass exodus from the crowded core infrastructure space is unlikely any time soon. Expectations had been slowly building that, as economic recovery took hold, investors taking refuge (and driving up prices) at the safe and steady end of the market would increasingly chance their arm on more opportunistic, value-add strategies.

But as the road to recovery now appears long and steep, this assessment is being revised. One placement agent who expected until recently that such a shift was just around the corner confides that he is now expecting little change in allocations over the next 18 months.

Perhaps the biggest fear expressed by those around the table was that overly ambitious growth assumptions regarding GDP-linked companies and assets (such as toll roads or airports) have made their way into business plans – predicated upon an economic scenario that may have seemed entirely viable a matter of months ago, but which now can only be viewed through rose-tinted spectacles.

On top of this, there is talk that some investors are making full use of a highly liquid financing environment by playing fast and loose with leverage. As the economic clouds refuse to lift, there is an uncomfortable sense that too much faith is being placed in a return to normal at a time when normality is proving elusive.