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Infrastructure equities: Upward potential despite obstacles

The Credit Suisse Supertrend «Infrastructure – Closing the gap» has faced a number of headwinds in 2018. The G20 meeting in Argentina was set to put infrastructure back into the spotlight on a global level. Infrastructure equities are attractive.

Infrastructure Supertrend was less successful in 2018

2018 has been a difficult year for infrastructure equity as the sector has declined in absolute terms and underperformed the broader equity markets. There are two reasons for this weak performance:

First, trade tensions between the USA and China have weighed on investor sentiment for materials and construction companies, which depend on the free flow of goods as global suppliers for infrastructure projects.

Second, rising interest rates in the USA and some Asian countries have increased the cost of financing infrastructure projects. As a result, the risk of project delays is growing and larger projects may even be canceled.

msci-infrastructure-index-outperforms-ten-year-us-interest-rates

MSCI Infrastructure Index outperforms ten-year US interest rates

Last data point: 07/11/2018.
Historical performance and financial market scenarios are not reliable indicators of current or future performance.
Source: Bloomberg, Credit Suisse

Infrastructure equities are a good buying opportunity

Despite these headwinds, the underlying fundamentals for the infrastructure theme remain intact: developed markets have to replace aging transport, electricity, water and telecom structures. Emerging markets, on the other hand, need to build new projects to accelerate their economic development.

The G20’s Global Infrastructure Hub still projects that the global infrastructure gap, which measures the shortfall between required infrastructure and the expected project developments at current investment levels, will widen to 15 trillion US dollar by 2040. Therefore, this year’s pullback of infrastructure equities is considered to be a buying opportunity. A number of catalysts should shift the topic back into investor focus next year.

Three possible catalysts in the infrastructure segment for 2019

  1. At the G20 meeting in Argentina, «Infrastructure for Development» was one of three agenda priorities, putting infrastructure into the spotlight at the global level. At the national level, individual countries are prioritizing various sub-themes. Germany is focused on affordable housing, for instance, while the US and China await the launch of 5G telecom infrastructure and Mexico looks to the transport sector.
  2. A bipartisan infrastructure bill may be an easy win for the newly divided US Congress as Democrats have signaled their support for it. In addition, greater fiscal control by the Democrat-controlled House could curb overly aggressive spending plans of the US administration, which should allay fears that interest rates may increase even more than expected.
  3. A potential trade deal between the USA and China would improve global economic growth prospects and remove a big factor of uncertainty for infrastructure.