We believe global industrial stocks can perform well despite a more challenging growth-policy mix in the second half of 2023. (UBS)

Tighter-for-longer monetary policy would likely lead to progressive slowing in developed market activity, with US GDP growth coming in around zero by early 2024. This near-term combination does not seem supportive of extensive business investment, at first glance.

Yet, we believe governments and companies are well-placed to invest in infrastructure—to upgrade old stock and boost long-run productivity, align business strategy with geopolitical pressures for underscoring, and to support ambitious decarbonization or net-zero targets.

Emerging Asia needs to invest USD 1.7 trillion in infrastructure each year from 2016 to 2030 to remain competitive, according to the Asian Development Bank. We expect about USD 40–50tr of global energy-transition investments in the years 2021–30, in support of net-zero efforts. And policies like the US Inflation Reduction Act and EU Green Deal Industrial Plan demonstrate government support for infrastructure.

Investors can look for near-term opportunities in global industrials equities. We are most preferred on global industrials stocks. The sector’s composition has become increasingly diversified and no longer behaves like a traditional cyclical play, in our view. We therefore believe it can perform well despite a more challenging growth-policy mix in the second half.

It should benefit from government incentives around the energy transition, decarbonization, and improved energy efficiency; higher defense spending after two decades of underspending for most NATO states in Europe; and increased mining and oil and gas capex given multiyear underinvestment. Ongoing earnings improvements look likely as order backlogs are worked through, the production outlook improves, and earnings visibility improves. Valuations are also supportive, with the MSCI AC World Industrials Index trading at 17.4 forward P/E, a 5% premium to its 10-year average as of 17 July. While above the broader market’s 16.4x multiple, the industrials segment looks interesting compared to lofty valuations in another secular growth sector, information technology (MSCI AC World Information Technology)—trading at 25.6x, a 36% premium to the 10-year average.

Thematic investors can find longer-term opportunities in automation and robotics, and greentech. Reshoring from low- to high-cost economies may support increased use of automation and robotics and a trend toward more digitalized, "contactless" manufacturing. This is increasing the proportion of high-margin software revenues and reducing the cyclicality of the theme, as automation investments become more ubiquitous across sectors. More efficient production processes are also a key driver for green manufacturing, helping to reduce CO2 emissions from the sector. We estimate the overall automation and robotics market to grow to USD 334bn in 2024, from USD 269bn in 2022.

We also remain positive on opportunities in global greentech. Definitive progress on carbon reduction at a global level will need to focus on infrastructure assets in power generation, transport, and industry, such as heating/cooling systems. We also expect to see technological developments and a broad-based move to global electrified vehicles (i.e., battery electric vehicles and plug-in hybrid electric vehicles). Such sales may account for a 30% share of the global market by 2025 and a 60–70% share by 2030, in our view. We identify the greatest opportunities across enabling technologies like renewable energy, transport, batteries, hydrogen, digitalization, and energy efficiency.

Private market infrastructure aligns with multiyear projects, can diversify, and support financial plans. Infrastructure-linked assets often operate on long-term contracts as they can take a long time to build. Fundraising activity has moderated in a higher-rate environment, but the USD 100bn raised last year aligns with the 2018–20 average (based on Pitchbook data). High barriers to entry and the monopolistic positioning of many infrastructure assets tend to make them less sensitive to the economic cycle, potentially providing portfolio diversification amid an uncertain outlook.

Exposure to this asset class may help investors balance their long-term spending plans with similar duration assets, especially as part of a financial plan for later in life and beyond. In addition, they can help stabilize income generation in a multi-asset class portfolio, particularly when accounting for long-term inflation. Since 2003, infrastructure has typically performed best when global inflation has been high (based on Cambridge Associates Infrastructure Index data).

Investors can gain infrastructure exposure directly or indirectly. For individual investors, direct exposure to the cash flows from utility, communication, or transportation assets can be attained via private market vehicles. We see value in assets linked to digital connectivity (5G, fiber networks, and data storage) and the energy transition (renewables, storage, and transmission).

Investors should, however, understand risks inherent to private markets. These include illiquidity, longer lockup periods, leverage, concentration risks, and limited control and transparency of underlying holdings. While risks cannot be fully eliminated, it is possible to mitigate them through strong due diligence and strict manager selection, and by diversifying across vintage years, strategies, and geographies. Above all, allocations to private markets should align with an investor’s particular financial goals, form part of a well-diversified portfolio, and be regularly reviewed as personal and market circumstances evolve.

Main contributors: Solita Marcelli, Mark Haefele, Matthew Carter, Jon Gordon, Christopher Swann, Alison Parums

Original report - Investing in infrastructure – why, where, how?, 21 July 2023.