Private infrastructure assets in Europe are set to generate portfolio-leading returns during the next decade, one asset manager believes.
In a sign of how strong the megatrends driving the industry are, such assets could eclipse the performance of equities by producing returns north of 10% in each year until 2034, according to DWS (see chart below).
Equities were the best performing asset class in the past decade, but given that we are now in a higher interest-rate environment it looks set to pass its crown to European infrastructure.
Indeed, the returns offered by equities are projected to shrink by more than half to 5.3% from the 12% recorded since 2014.
The 12.8% the asset manager’s long-term capital market assumptions framework estimates private infrastructure will generate in Europe during the next decade is almost 35% greater than the 9.5% such assets returned in the previous 10 years.
It’s not just the private side of the sector that could produce an impressive performance. Listed infrastructure is close behind, potentially returning 6.5%, the same as it has since 2014.
Such growth will not simply be driven by strong fundamentals alone. Economies are changing and infrastructure is not only crucial to keeping countries competitive by running smoothly, but they are on the front line of enabling digitalisation.
This will drive greater need for energy given the forecast increase in artificial intelligence adoption and demand for data. Serving rising populations across Western Europe is another reason to generate more power.
And where that energy comes from provides another opportunity for institutional investors. To decarbonise the economy by 2050, more cleaner sources of power need to be perfected, built and be operational if governments’ net-zero targets are to be achieved.
But it’s not just about the financial gains. The asset class can benefit portfolios in other ways. One being that if, as expected, inflation returns on the back of increasing de-globalisation and President Trump’s proposed import tariffs. In such circumstances, infrastructure could offer protection.
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