One of the “most significant developments” that could result from a higher interest rate environment is increased investment in core and core-plus infrastructure assets, according to BlackRock Real Assets managing director Alan Synnott.
On stage at Infrastructure Investor’s Global Summit, in Berlin, Synnott, global head of BlackRock’s research and product strategy, said the firm’s current assumption for interest rate hikes is that the US 10-year treasury yields will move from 2.7 percent to 3.6 percent in the next five years. He said this sort of shift would lead to “movement in [investors’] risk” assumptions for infrastructure, leading them to seek more stable core and core-plus assets.
“There’s still a very large constituency of limited partners whose plan for infrastructure is a straight-line allocation for 10 or 20 years,” Synnott said. “You’re going to see a higher variable, long-term infrastructure cycle where returns move up and down.”
To offset that variability, he says, investors will seek exposure to assets with more predictable cashflows.
There have been increasing concerns about interest rate hikes since last September, when the US Federal Reserve announced it would begin rolling back it’s $4.5 trillion balance sheet collected as part of its Great Recession stimulus package. The central bank raised its benchmark interest rate target to between 1.25 percent and 1.5 percent at the end of last year.
But Declan O’Brien, a senior infrastructure analyst at UBS Asset Management who spoke alongside Synnott, said higher global interest rates would not dampen interest in the asset class.
“Interest rates seldom rise in isolation. It’s typically in response to rising GDP growth and above average inflation,” O’Brien said. “As long as we don’t get really big rate increases, and we don’t enter a very strong GDP environment, I think allocations to the asset class should probably remain unaffected.”