While prohibitively high debt levels, persistently low interest rates and growing infrastructure demands around the world present a mixed bag of news in general, the outlook overall is a positive one for private capital and infrastructure investment in the next several years.
“The classic model where governments were the key investor in infrastructure, I think is dead,” Markus Schomer, managing director and chief economist at New York-based asset manager PineBridge Investments, told attendees at Infrastructure Investor’s sixth LP Summit held in New York in early December.
“If I look around the world I see almost everybody hitting debt levels and encountering speed bumps in terms of growing public budgets,” he said. “Therefore, as a driver of infrastructure, I think the private sector will become even more important than it’s already been.”
Beyond developed economies
Developed countries are not the only ones struggling with high debt levels and widening deficits.
“The debt levels in emerging markets are already at levels where it doesn’t take much more to get them into trouble as well,” he noted.
One example is China where infrastructure investment was primarily government-driven but which is now moving towards a more consumer-based model.
“The [Chinese] government is trying to pull away or pull out of a lot of these financing projects because of the increase in leverage. So, I think that would actually be an interesting country going forward [in terms of infrastructure investment],” he said, indicating at the same time that how China evolves institutionally will also determine its level of attractiveness.
In Latin America, where infrastructure is one of the reasons why growth is not at a pace where it could be, the issue is primarily political. “The question will be ‘are these countries willing and open enough to involve the private sector?’”, Schomer asked.
A country for which the answer to that question is ‘yes’, is Mexico given the government’s efforts to open up the energy sector to private investment.
“That will be a huge boon for the economy, but also I think [it will present] great opportunities for the private sector to get involved in [perhaps] exploration, but certainly in building infrastructure to get the oil from the Gulf to where the refineries are,” he explained.
Something that hasn’t benefitted the asset class is low interest rates, which Schomer does not expect to change any time soon. “We’ll not go back to the kind of interest rates seen in the late 2000s, for example.”
PineBridge’s forecasts for increase rate increases are relatively modest. For example, for US treasury yields on 10-year bonds, the investment firm forecasts about 50-75 basis point increases per year over the next three to four years.
“I think everyone agrees the bull market in bonds is over; interest rates are not going further down but I think the upside pressure is also probably more muted than most people would expect,” Schomer said, adding that a significant inflation push either in the US or in most parts of the world is unlikely.
The bottom line is that from a macroeconomic view, the US matters. “I think the business cycle right now is very US-centric. It very much starts here and from here will impact the rest of the world,” he said. “Asia and Europe do depend on the value of their currency, the export demand for their goods, but in the US we don’t have these issues.”
From an infrastructure perspective, Schomer believes that demand for infrastructure projects, in real dollar terms, will come from advanced economies such as the US and Europe “simply because of the size of their economies”. But he expects demand to be just as high, in relative terms, in emerging markets.
“I see a confluence of positive factors for the asset class which is a supply of necessary and needed infrastructure projects and, at the same time, a dearth of public financing for these projects, which puts the emphasis on private funds,” he concluded.