During 2023, the continuation of interest rate hikes by Central Banks resulted in a challenging year for many listed infrastructure companies, most notably those with a higher degree of long-term contracted cash flows. Higher interest rates lower the present value of future cash flows, and so the downward move in share prices of listed  infrastructure companies with long duration revenue streams was somewhat rational, but at times the quantum of the share price moves was not.

By and large, infrastructure companies did well to adopt their strategies to a world where abundant cheap capital was no longer readily available. We observed a focus on deleveraging, accessing capital through avenues other than equity issuances, such as asset recycling or joint ventures, and investment pipelines narrowing to focus on high conviction markets or technologies.

Renewable energy companies performed poorly within the wider infrastructure universe throughout the year, with valuations hitting decade lows and investor sentiment negative  towards the sector. Despite this, 2023 set new records for the growth of renewable energy investment and companies continued to execute on strategic growth objectives. The struggles of the US offshore wind market grabbed headlines, but this is a small part of the global market. Solar, onshore wind, and offshore wind outside of the US continue to perform well and attract record flows of capital for new projects.

The year-end rally in infrastructure companies reinforced our view that the fundamentals for them remain strong. 2023 has shown that companies which own operational infrastructure assets will continue to generate defensive and growing cash flows, and the delivery of selected pipeline investments can drive additional earnings growth.

 

Outlook for 2024

The primary “known unknown” as we head into 2024 is the impact of higher interest rates on the economy and, more directly, corporate earnings. In a slower growth, higher interest rate environment, where earnings growth is harder to come by, the defensive nature of infrastructure should be recognised by investors. Core and social infrastructure companies do not have to do much to grow earnings and dividends, and on starting yields above 7%, they look attractive. Visibility on where peak interest rates settle enables confidence in pricing real assets. With public market valuations looking cheap, and institutional dry powder looking for deals, M&A activity may continue should a rebound in stock prices not occur.

Digital infrastructure delivered positive returns in 2023 and remains one of the highest growth infrastructure sub-sectors in the coming years. In particular, 2024 should provide a better view on the strength of demand for data centre space, with artificial intelligence continuing to work its way into the mainstream. Demand for data centre space continues to be resilient, and new supply is likely to be hampered by permitting issues, primarily related to electricity grid constraints. This should translate to positive earnings growth, and reward data centre businesses with well-developed pipelines.

We expect that the rollout of renewable energy will continue at pace, and with stakeholders having adapted to the price pressures put on the market last year, the investment environment looks more attractive. The US election, and reemergence of Donald Trump, is likely to put the focus back on the US renewable energy market. Foresight Capital Management (“FCM”) believe fears of a material impact from a Trump win are unlikely, primarily due to a congested political system. This makes  it difficult to affect major change, and the impact on jobs in Republican states (which are seeing disproportionate benefits from the growth of renewables) may prove deeply unpopular.

On the contrary, FCM expect to see governments around the world looking to accelerate the deployment of renewable energy. Attracting infrastructure investments is crucial for governments looking to decarbonise and increase the security of energy supply. Blue chip corporations are also emerging as a demand source for clean power as they seek to decarbonise, with some 3,680 companies committed to the Science Based Targets Initiative in 2023, more than all prior years combined, according to data compiled by Bloomberg NEF. This results in an attractive environment for our renewable energy investments, who have both the ability and capital to deliver projects that can provide the much-desired green electrons.

We favour companies that are structurally supported by three long-term themes: decarbonisation, digital infrastructure that supports a digital world, and the need for traditional infrastructure projects that support everyday life. We continue to view both the renewable energy and digital infrastructure sectors as attractively positioned for growth, with traditional infrastructure a low risk and high-income diversifier. Increased digitisation of global economies is a structural trend expected to continue for many years and demand for the infrastructure used by the digital world should remain insulated from shorter term economic cycles.

The energy transition trend and global decarbonisation imperative also continues to provide attractive investment opportunities for the strategy across the renewable energy and energy efficiency sectors. Renewable energy companies suffered weak stock price performance through 2023, however the sector remains a conviction investment theme within our portfolios, with the positioning driven by the attractive valuations on offer.