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AI's $4.2 Trillion Infrastructure Boom: How To Invest Now
(MENAFN- Khaleej Times) Trillions of dollars will be spent around the world in the next decade to build and upgrade everything from bridges and airports to colossal AI data centres. Investors have long taken advantage of buying into the nuts and bolts of global infrastructure through debt or stocks related to the companies or projects involved. Now there is even more focus on the sector as the world rushes to supply power and buildings to fuel and house the brain centres for artificial intelligence.
Infrastructure, traditionally viewed as a stodgy defensive sector, is now at the centre of interlocking mega forces
Blackrock Investment Institute
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The US-based asset manager says most investors could benefit from increasing their holdings in this diverse asset class. BlackRock Investment Institute said that listed infrastructure stocks this year were trading at about 20 per cent below their long-term average, by some measures.
“Beyond the AI buildout, multiple mega forces support long-term demand. Valuations look low to fair versus history. And cash flows that often adjust with rising prices can help hedge inflation risk,” BlackRock says.
Infrastructure investments are often regulated, though the extent varies by country. Infrastructure projects can also have long-term contracts that adjust with inflation, providing investors with predictable income, according to BlackRock.
Infrastructure is obviously not just about technology. Traditionally representing transportation, like railroads, airports, ports and highways, it also includes energy assets in a world where governments are increasingly concerned about energy security. Telecommunications, waste management, water systems, and digital networks are all a part of it.
“There’s a consistency in that because these are unique assets, there’s an irreplaceability to these assets,” said Peter Boockvar, chief investment officer at One Point BFG Wealth Partners. “A lot of infrastructure-related companies are regulated to an extent in what they can return, whether it’s a utility, a toll road, or an airport. So on one hand, they’re subject to government regulation and economics, but on the other hand, it can be a monopoly position when you have it.”
According to insurer Allianz, the world will need to invest 3.5 per cent of global Gross Domestic Product or about $4.2 trillion per year in infrastructure projects over the next decade “to future-proof social, transport, energy and digital infrastructure against megatrends such as urbanisation, supply chain disruptions and AI-driven digitalisation.”
A large portion of the money will be spent in the emerging world as shifts in demographics and urbanisation require new infrastructure. In developed markets, many projects will focus on upgrades and replacements for ageing, outdated infrastructure. The bulk of the spending will be on energy-related projects, with electrification being a major part. This has made for a rapidly growing private infrastructure debt market. But investors can also find accessible ways to play these investments in public markets through open-end funds, closed-end funds, individual stocks and bonds, or Exchange Traded Funds, many of which are available. Investors should consider their currency exposure when trading in international markets.
Just as investors are now questioning whether there’s an AI bubble in the stock market, they are debating the build-out of AI data centres and whether the hyperscaler tech giants are spending too much money on them. There are also concerns about whether AI technology could advance so quickly as to make some of these centres irrelevant even before completion. There are also worries about whether there will be the power they need in the right locations.
“You can imagine different points of view on it, but directionally, we know where this is headed. This may not happen quite as quickly as people expect. It may have fits and starts. At the end of the day, these are secular trends that are going to continue,” said Don Dimitrievich, head of energy infrastructure credit at Nuveen. “This is a multi-decade opportunity, and certainly in this next decade, we see things as already set, and the train has left the station. It’s a huge, huge capital investment opportunity.”
Electrification is an important part of the buildout globally, as data centres will require reliable 24/7 power sources. Investors can consider stocks in companies that are part of the power supply chain, from utilities to renewable and traditional energy sources, to the transmission lines that carry electricity and power generation equipment. “These trends present both an opportunity on the credit side, which typically on a given project, 80 per cent of the capital structure is debt financed, and then 20 per cent is equity financed,” he said. “So there’s hundreds of billions of dollars of opportunity annually between debt and equity as we build out these infrastructure systems.”
Nuveen invests in projects and then manages funds that allow institutional and other investors to participate in the projects. “We do more traditional closed-end funds,” Dimitrievich said. “Increasingly, we’re seeing retail investors who want to have access to this asset class.”
Boockvar said he is interested in the more traditional types of infrastructure plays. He said he had invested in an airport in the past, and it had paid a good dividend. He said shopping centres, for instance, could be attractive since they provide retail space for the everyday services consumers need.
Ports and shipping provide opportunities in global stock markets. Chinese port companies, like Cosco and China Merchants, are publicly traded, as is Danish Maersk. Rail is another industry that investors can ride in markets. In the US, there are publicly traded freight companies. Japan has publicly traded passenger lines, and there are listed railroads in both China and Canada.
Boockvar warns that not all infrastructure plays trade the same way or is influenced by the same economic trends.
If you’re considering rail as infrastructure, it’s subject to the shipments of coal and autos and grains and stuff. Travel is dependent on the travel industry if you own an airport. A port is subject to global trade.
Peter Boockvar
But he likes the steadiness of these assets and currently invests in infrastructure through an ETF with global infrastructure stocks holdings.
Morningstar Direct provided a list of some of the largest global infrastructure ETFs. They include Global X US Infrastructure Development ETF; iShares Global Infrastructure ETF; among others. All of them have gained so far this year.
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