Infrastructure plays in Asian portfolios

05 May 2014   Category: News, Asia, Global, USA   By David Macfarlane

Investors are increasingly looking at infrastructure on a global, rather than regional, basis. That said, Asia Pacific represents a significant component of the global emerging market infrastructure opportunity set.

According to Greg Maclean, global head of research, infrastructure at AMP Capital, individual investors’ investment strategies and specific objectives will drive a range of decisions about how and where they invest. “For investors seeking higher levels of return, which generally requires an investor to move up the risk/return spectrum, one way of achieving this is through investing in new build or “greenfield” infrastructure projects,” he says. “Developing countries tend to have a significant proportion of greenfield projects reflecting the need in those countries for new infrastructure driven by trends such as urbanisation and growing populations.”

Mr. Maclean explains that in terms of particular sectors, it will vary across different countries.  For example:

  • Japan has a strong focus on the privatisation of existing assets, with airports being at the top of the list;
  • In India, there are many opportunities in the transport and health sectors;
  • Opportunities in China are often driven by the urbanisation trend, for example gas distribution in new or expanding cities;
  • Indonesia and the Philippines have adopted PPP models, and are seeking to attract private sector capital across a broad range of economic infrastructure sectors.

Depending on how you define the region, you could argue that Asia Pacific is already well represented via Australia on institutional investors’ radar,” says Perry Clausen, head of global infrastructure investments at First State Investments, adding that in 2013, around half of the brownfield activity by value came from Australia.

The other caveat is that the region is heterogeneous, ranging from highly advanced economies such as Japan to developing plays such as Bangladesh or Myanmar. So it is folly to generalise.

As a general comment, however, Mr. Clausen adds: “It is rare that markets have (i) foreign capital requirements, (ii) quality of infrastructure, (iii) investor protections (rule of law and property rights) and (iv) economic pricing, making Asia Pacific a highly selective and opportunistic play.

“In terms of sectors, the three that stand out are power, roads and water – all have significant spending requirements. According to recent World Bank estimates, US$2.5 trillion is needed across these sectors for South Asia alone by 2020. These are largely greenfield in nature. To the extent that current greenfield opportunities translate into future brownfield opportunities, we would consider these worth monitoring. However, we still see significant obstacles for widespread institutional participation in the short term.”

Benjamin Morton, SVP, portfolio manager at Cohen & Steers, goes on to say: “We believe that, over the long term, a global listed infrastructure portfolio will benefit from having a structural allocation to Asia Pacific companies as a diversifier. Specific areas of attractive investment opportunities include the energy and transportation sectors in China, both of which are benefitting from structural changes in their market – and are not dependent on outsized economic growth in the region. We are also seeing increased privatisation activity in Japan, which could accelerate as the government contemplates selling some of its airports and urban subway networks to the private sector.”

Infrastructure poised for rapid growth

The April 2014 issue of The Cerulli Edge – US Monthly Product Trends, analyses product strategy and development. Highlights from the research included the following on infrastructure investment: “Close to half (47%) of North American institutional investors surveyed in 2014 intend to increase their allocation to infrastructure, according to Preqin. For retail investors, infrastructure funds, including those that use in master limited partnership (MLP) funds to invest in oil and gas infrastructure, offer attractive yields and can operate as a hedge against inflation. Infrastructure funds may be poised for rapid growth – flows for the category were $2.7 billion in 2013 compared to only $892 million in 2012”.