Global infrastructure investments to benefit from AI and the energy transition

Global listed infrastructure is an asset class many South African retirement fund investors have yet to take advantage of, given the previous restrictions around offshore exposure. Locally, investable infrastructure projects have been thin on the ground. Yet global infrastructure offers inflation protection and income generation, and acts as a diversifier of traditional asset classes.

More recently, as global interest rates have risen, some investors have shied away from listed infrastructure in the belief that its performance is sensitive to interest rates. This has acted as a drag on its performance as an asset class. However, for us at M&G Investments, fear creates opportunity, and as managers of infrastructure assets we strongly believe that today's valuation levels present a highly attractive entry point for long-term investors.

We remain optimistic about the longer-term prospects for listed infrastructure as well, as powerful structural trends such as artificial intelligence and the global green energy transition continue to drive growth in the asset class.

In a recent update to investors, M&G Investments (UK) Fund Manager Alex Araujo, who has been managing the strategy for the past five years, shared how these opportunities and themes have been incorporated into the positioning of the M&G Global Listed Infrastructure Fund. The M&G Global Listed Infrastructure Feeder Fund for local institutional investors launched in South Africa earlier this year.

Artificial intelligence

Artificial Intelligence (AI) has been a dominant theme in global equity markets recently, not only in terms of listed AI companies, but also because it can help businesses reach new levels of efficiency and ultimately enhance long-term growth for shareholders.

“Investing in listed infrastructure provides exposure to the explosive growth in AI in a number of ways,” Araujo said. “Data centres, for example, are critical to AI’s success given the ongoing demand for computational resources.” This bodes well, he said, for revenue growth and pricing power at data centre companies such as Equinix, which remains a core holding in the portfolio.

Another way that AI has the potential to revolutionise global listed infrastructure is by facilitating the development of smart grids, which will help optimise electricity distribution and consumption. AI can also analyse large amounts of data, including weather, consumption patterns and the status of the network, to help listed utilities predict energy demand and manage energy resources efficiently.  Italy’s Enel, for example, a top 10 holding in the fund, established a subsidiary in 2021 that is dedicated to the provision of smart grid solutions to distribution system operators.

AI can also play a crucial role in improving water resource management.  “By using machine-learning algorithms and real-time data analysis, smart water systems can detect leaks, predict water demand, and optimise water distribution.”  American Water Works, another core holding in the fund, has been using machine learning to monitor its ageing network of water pipes, detect deteriorating tank coating, and predict water leakage.

According to Araujo, transportation infrastructure companies can also leverage AI to improve mobility efficiency and safety.  Traffic management systems using AI for predictive analytics can optimise traffic flow, reduce congestion, and enhance road safety.  Toll road operators can use data analytics to predict demand patterns and dynamically adjust tolls to maximise revenue. For example, the Spanish toll road company Ferrovial is developing a project that uses AI to integrate conventional, connected and autonomous vehicles so that they can co-exist harmoniously on the roads of the future.  

“We are merely scratching the surface,” noted the fund manager. “By incorporating AI, infrastructure is potentially embarking on a new era in which the qualities of its critical assets become even more appealing.”

The green energy transition

The transition to renewable energy that is aimed at addressing climate change is another theme that features prominently in the infrastructure fund.  In the US, the private sector has committed more than US$100 billion in new clean energy manufacturing investments, including more than US$70 billion in the electric vehicle (EV) supply chain and more than US$10 billion in solar manufacturing. 

US electricity generation from wind is expected to triple and solar generation to increase by as much as eight-fold by 2030 as the world’s leading economy aims to meet its climate goals, build a clean energy economy, and strengthen energy security.

“We believe this ambitious programme is topical and timely.  The increasing incidence of extreme weather events and the havoc they bring to communities around the world provide a constant reminder that the task is urgent,” Araujo said.

“Infrastructure is widely acknowledged as central to the long-term energy transition, with utilities playing a pivotal role in the development of renewables, the reconfiguration of grids to accommodate new sources of energy, and the development of low-voltage networks for the modern age.  We believe the tailwind for infrastructure is here to stay.”

Cheapest since COVID times 

With utilities and companies structured as real estate investment trusts (REITs) bearing the brunt of the negative investor sentiment so far this year, M&G believes it is an opportune time for long-term investors to consider adding these assets to their portfolios. As shown in the graph, the MSCI ACWI Utilities Index and the MSCI ACWI Real Estate Index are trading at their cheapest levels since the global pandemic, after which time both sectors saw their valuations recover significantly.

“This valuation support gives us confidence that the asset class can recover from its recent bout of volatility”, noted Araujo. “We have experienced similar periods of market nervousness in the past. On each occasion, we have acted with conviction by buying into weakness where we think the long-term growth opportunity remains intact and were subsequently rewarded with bursts of strong performance. We expect the current circumstances to be no different.”

South African investors have held relatively little exposure to both global and local infrastructure assets. This has been due to the restrictions on offshore investments imposed by Regulation 28 of the Pension Funds Act, as well as the scarcity of investable listed assets with infrastructure exposure in South Africa. Since the offshore limit has been raised to 45% of a portfolio, local investors are looking for other global equity options to enhance the diversification of their offshore holdings and provide alternative investment return profiles. What better way to both lower risk and enhance return potential than investing in a fund that can equally help facilitate the global energy transition in a sustainable way? South African investors can gain easy, direct access to global listed infrastructure assets and their attractive growth and inflation protection benefits through the M&G Global Listed Infrastructure Feeder Fund (ZAR).