Outlook 2014: A changing equilibrium

Inflation figures released this week show that, in most of the world’s developed economies, prices have been held tightly in check: the UK’s benchmark rate fell to a four-year low of 2.1 percent in November; inflation remains well below target in the Eurozone and the US.

But there’s at least one market where, over the last few years, no such restraint has been observed. “Right now it’s fair to say that infrastructure assets are very expensive,” said Alain Carrier, global head of infrastructure at Canada Pension Plan Investment Board (CPPIB), during an interview with Infrastructure Investor. “One reason is that there is now a lot more capital chasing a limited number of assets, and this imbalance between supply and demand creates a very competitive environment.”

Carrier thinks this will raise an important question next year: whether infrastructure will continue to rise in popularity as an asset class – with more capital flowing in – or if competition for assets will start to abate.

A crucial factor, he said, will be the changing macroeconomic environment. “One of the most attractive features of the asset class has been the ability to extract yield at – in some cases – reasonably low risk. But along with a return to economic growth, there is now a growing risk appetite among the most global investors. This could have strong implications for the general attractiveness of the asset class, as well as for the pricing of infrastructure assets.”

Such developments will happen in a markedly different macro-economic context, with the reversal of capital flows likely to impact markets, currencies and the broader economy. This is already obvious in the case of emerging markets, Carrier said. Developing economies saw billions flow out of their borders when the Federal Reserve started talking of a possible tapering to its bond buying program last May.

The global economic outlook could also influence impending regulation, he argued. “We’ve seen some movement on the regulatory front in a number markets over the last two years. Are we going to see a further squeeze or will that abate? I would hope there will be no surprise – but this will likely depend on the direction of the economy.”

Carrier doesn’t think the return to risk appetite will trigger a pronounced migration towards greenfield assets, which he said are generally the focus of a different type of investors. But he is optimistic that a more buoyant economic climate will help companies more usually involved in the financing of such assets, typically large construction firms, reach a close on greenfield projects.