The debate has been raging fiercely for some time now: does the world economy face a bigger threat from deflation or inflation? Those for whom inflation is the bogeyman live in fear of what might happen when the massive liquidity boost provided by governments’ fiscal stimuli and quantitative easing programmes is combined with economic recovery. Among their number are pension funds, increasingly flocking to investment classes they see as offering an inflation hedge – infrastructure chief among them.
No coincidence then that the week’s top story on Infrastructure Investor.com was pension giant CalSTRS' plan to ramp-up its infrastructure team and become a “world-class infrastructure investor” – a similar proclamation to one made previously by fellow US pension giant CalPERS.
The attitude of pensions is more important to infrastructure than other alternative asset classes. Pensions form more than 60 percent of infrastructure's limited partner universe, according to a recent survey. So their opinion matters – a lot.
Pensions' inflation fears are therefore an important contributor to the latest fundraising figures from placement agent Probitas Partners. In the first half of this year, infrastructure funds worldwide raised nearly $10 billion – almost as much as in the whole of 2009, according to Probitas.
While private equity and real estate are also showing modest recoveries in fundraising totals, the infrastructure revival is not due solely to renewed enthusiasm for illiquid asset classes. That is happening, but on a highly selective basis. Instead, as another survey shows, the share of portfolio allocation devoted to infrastructure is set to grow at a faster rate than for other alternative assets.
Which brings us back to the original question: should investors be fearing inflation or deflation?
If deflation is indeed the real bogeyman then, as one source we spoke to recently expressed it: “All bets are off”. In that event, perhaps investors should be hoarding gold – said to be the only true hedge against both deflation and inflation.
If it's inflation, then infrastructure should instead be favoured. And judging by where pensions are making their bets, for now, at least, the latter seems much more likely than the former.