Source: EDHECinfra (2022a) and MSCI (2022) as of June 2022
Note: Annual returns are based on monthly gross returns data in a calendar year. The indicies present aggregate performance levels. Listed global equity performance is measured by the MSCI All Country World Index (MSCI ACWI), listed infrastructure equity performance is measured by the MSCI ACWI Infrastructure Capped Index (MSCI ACWI-IC), and unlisted infrastructure equities performance is measured by EDHECinfra's Infra300 equity index.
Inflation shook the world economic order in 2022, reaching record-high double-digit rates last seen in the 1970s and 1980s. In response, central banks are curbing the likely detrimental impacts with interest rate hikes. While these interest rate shocks unequivocally reduce the attractiveness of equity markets, infrastructure equities have been more resilient to the shocks than other equities.
Infrastructure equities are more resilient to inflation shocks because their revenues remain steady. Infrastructure companies provide essential commodities like electricity, transport, water, or communication, for which demand holds strong even when incomes decline or prices increase. And usually, infrastructure assets have an explicit link to inflation through regulation, concession agreements, or contracts. Those assets that don’t have an explicit link often have the pricing power to deliver a similar (or better) outcome reflecting their strong strategic position. So in the case of infrastructure, either inelastic demand or contractual indexation to inflation provide a means to pass rising costs on to the end user.
The steady revenues support higher dividend yields, thereby adding another layer of income support for infrastructure equity holders. In 2022, dividend yield on listed global equities was 2.3%, while that on listed infrastructure equities was 3.9%. The tangible real assets held by infrastructure equities also add inflation-hedging potential; it costs more to develop similar new assets, so the value of real assets typically rises with inflation. The ratio of equity purchase price to net asset value, measured by the price-to-book value ratio, was 2.5 for listed global equities and 1.9 for listed infrastructure equities in 2022.
During the first half of 2022, rapid inflation shocks reduced annual return on equities. However, private capital invested in infrastructure was more resilient to inflation shocks. The reduction in annual return on infrastructure equities (-6% on listed infrastructure equities and -5% on unlisted infrastructure equities) was significantly less than that on listed global equities (-20%).
Despite the sluggish economic activity, heightened uncertainty during the pandemic, and the decline in returns in 2022, investors are allocating more capital than ever towards the infrastructure asset class to mitigate inflation risk. In 2020 and 2021, private capital raised for infrastructure investments reached record highs of USD122 billion and USD128 billion respectively, continuing the sustained growth of the past decade. By the end of 2022, the level of capital raised had reached another record high of USD172 billion.
In an inflationary environment, infrastructure equities can deliver stronger and more resilient performance than the broader equity market due to the inflation-hedging characteristics built into infrastructure contracts. Against this backdrop, infrastructure funds have been raising record levels of private capital for infrastructure. With inflation expected to remain elevated throughout 2023, the resilience and stability of infrastructure assets will continue to offer an attractive haven for investors looking to mitigate inflation risk.