Outlook 2014: The new rules of the game

James Wardlaw, head of infrastructure at Campbell Lutyens, thinks 2014 could see the emergence of an infrastructure industry body – in a context where the end of quantitative easing will prompt both questions and innovation.  

If 2013 was an eventful year for infrastructure – marked with some momentous fundraises, fresh regulatory issues in a number of markets and a string of mega-deals – 2014 could be a year of turning points for the asset class, says James Wardlaw, head of infrastructure at placement agent Campbell Lutyens.

For a start, investors will likely ponder on the implications of the gradual unwinding of quantitative easing (QE) in a number of markets. Wardlaw thinks this will play out first in the US, where tapering is already in the cards, followed by the UK and eventually the Eurozone. “Long term interest rates will rise, as a result of the unwinding of QE, and the implications of that for valuations and portfolio construction are quite profound. We’ll see that start to play out over the course of 2014.”

A lack of clarity will also persist as to where inflation is heading, with the end of huge liquidity injections by central banks into bond markets, amid a climate of selective economic recovery, having yet inconclusive effects on prices. The attractiveness of infrastructure being partly reliant on their ability to serve as an inflation hedge, Wardlaw believes the eventual direction of inflation is something investors will likely be watching closely.

The hunt for increased returns in infrastructure could prompt some investors to venture outside their comfort zone, he said. “More people are going to be happy to dip their toes in greenfield, provided construction risk is properly managed. They will be happy to take incremental risk because the incremental returns on offer are going to be that much greater.”

Southern Europe could similarly benefit, with investors on the hunt for value likely to be attracted by operating assets or renewables. “Maybe at that point some of the relatively unloved parts of the infrastructure market could become attractive again to some people.”

But the year should also see the industry trying to answer some recurring questions. And perhaps the most crucial one, Wardlaw says, will be whether its participants will walk the walk of setting up an industry body.

“They have it in private equity and real estate, and although there’s been calls for it we haven’t got it in infrastructure. Is there a sufficient willingness on the part of the industry to put the resources behind it to make it happen? There really is a need for that.”