With the covid-19 crisis barely out of sight, markets are bracing themselves for the next challenge. Eurozone inflation this week rose to a 10-year high, while US inflation last month climbed to a 13-year high. These are the peaks of a risk many have been sounding the alarm about for several months, including Blackstone’s chief operating officer Jon Gray, who told investors in April that inflation was the “major risk that’s out there today”.
And while senior figures such as US Federal Reserve chairman Jerome Powell believe these spikes to be temporary, Australia’s Future Fund chairman Peter Costello had a warning for that train of thought. “I think it’s too easy just to say ‘it’s transitory, it will go, and it will all disappear’, and I think it’s a convenient thing to think,” he told the Sydney Morning Herald last week.
So, if we were to take Costello’s more conservative approach and consider inflation a longer-term risk, how could this impact infrastructure investors and their portfolios? It was a question we put to the market as part of our Global Investor 50 ranking in June, to which responses were largely wary but not overly concerned, apart from Karim Mourad, global head of infrastructure at the Abu Dhabi Investment Authority.
“Inflation is definitely a big concern,” he said. “A vast majority of our investments have hedging attributes to inflation. However, looking forward and for future investments, this risk is often passed down to the long-term holders and the assumptions taken in the markets are often in line with governing bodies’ target inflation. For now, we need to remain careful and seek investments that continue showing inflation-hedging attributes.”
However, several other investors are looking at the “hedging attributes” element of Mourad’s answer and might seek infrastructure as a safe haven. Alecta, Sweden’s largest pension fund, which invested in the telecoms towers business of Telia alongside Brookfield in June, is planning to increase the share of real assets in its portfolio from 12 percent today to 20 percent in 2024. This is in part a response to inflation worries, chief investment officer Hans Sterte told Bloomberg last week.
A research paper released last week by BlackRock Real Assets – putting its obvious interests aside – noted the “implicit inflation linkage in energy and power infrastructure” generated by increased demand, with midstream assets in line for a post-covid reprieve, while growth in renewables will only continue in a higher-inflation world as demand outstrips concerns over a rise in construction costs, the paper stated.
Is there a catch? Possibly, but a circumspect Anne Valentine Andrews, BlackRock’s global real assets chief, is confident infrastructure’s characteristics can weather this next challenge, as she explained for an upcoming feature on inflation for our September issue.
“We are already seeing the cost of building materials spiralling and, in the long run, I do think things will get more expensive,” she said. “The answer is to focus on those things that lie within your power – the types of assets you invest in, the location of those assets, the essentiality of those assets. And then gain as much protection as possible by structuring the best deal that you can.”
Infrastructure investors should be encouraged. That element of control was absent from the covid-19 crisis, and having largely weathered that with reasonable resiliency, inflation might just be another hurdle to clear.