Infrastructure - Why investors should target this sector

Infrastructure in many countries no longer meets today's requirements and needs to be expanded or modernised.
In addition, the COVID 19 pandemic is accelerating megatrends that could change people's basic way of life.
As a result, investment in digitisation, more efficient transport and greater sustainability should become more important.

9 minutes reading time

1. A gap with consequences

We have underinvested in infrastructure for some time now. It is true that approximately US$ 2.5 trillion a year is spent on transport, electricity, water and telecommunications systems worldwide.^[1] But this amount is not enough to meet the growing demands on our infrastructure. According to estimates by the consulting agency McKinsey & Company, investment needs to be increased to an average of 3.3 trillion US dollars per year by 2030, with 60% of this attributable to emerging markets.^[2] If we also take into account the additional investment needed to meet the UN's sustainable development goals, the financing gap widens further. Experts say that we do not just need more money, we must also use it more efficiently.

2. It is getting crowded in our cities

Back in 1950, less than a third of the world's population lived in cities.^[3] By 2007, more than 50 % of the world's population was living in cities. The United Nations expects that figure to rise to around 70 % by 2050. As a result, more and more megacities are emerging, with many millions of people concentrated in a very confined space. They all need housing, water and food. Sewers and roads must also keep pace with growth. In order to meet rising energy demands in times of climate change, we must also generate electricity in a way that is as efficient and emission-free as possible. This is an enormous challenge – and not just for megacities in emerging markets.

3. Rising water use

According to the United Nations World Water Report, global water consumption has been increasing by about one percent per year since the 1980s.^[4] The report says that three out of ten people do not have permanent access to clean drinking water. This water stress will continue to increase, partly due to the effects of climate change. In addition, more than 80 percent of the world's waste water ends up in the environment untreated.^[5] Water-related diseases such as cholera are therefore still widespread in many developing countries. One way forward could be infrastructure that minimises water loss and makes more water available through treatment and desalination.

How the world’s freshwater is divided up

98 percent of the worldwide water reserves are salt water. Of the remaining 2 percent freshwater resources most are icebound.

The energy turnaround with many decentralised producers requires a completely new electricity grid that intelligently links consumers and producers.

4. Only smart networks have a future

To date, electricity grids have been rather simple: they transport electricity from A to B and nothing more. This is set to change in future with intelligent networks. These networks will become a communication platform. Electricity meters will communicate with solar plants, offshore wind farms in the North Sea with local energy suppliers, washing machines with other consumer appliances. These smart grids are a prerequisite for the energy turnaround, which features more and more local electricity producers, to work. The billion-euro business around these "smart grids" is not just attracting network operators and metering companies; IT groups and telecom operators also want their share of the cake.

5. 5G - Turbo for digitisation

At last, fast Internet is coming to even the remotest corners of the country. The new 5G mobile phone standard, which is currently being developed, will make this possible. To this end, mobile phone operators are installing small communication nodes on traffic signs, street lights and electricity pylons. 5G will not only speed up smartphones, but also network sensors, vehicles and machines, thus making the Internet of Things a reality. 5G is expected to make industry more efficient, mobility safer and everyday life more comfortable.

Worldwide use of mobile data

For years, the volume of data running over mobile phone networks has been growing. There is no end in sight to this trend. To the contrary: the increasing networking of many sensors (Internet of Things) will provide a further boost.

6. Intelligent traffic control

When traffic flows, you reach your destination faster and use less energy. According to estimates, networking via radio-controlled sensors, both between vehicles and with transport infrastructure, could save transport costs of eight billion euros annually in Germany alone.^[6] If a vehicle communicates with traffic lights, for example, its travel speed can be adjusted to what is ideal to catch the green light. When visibility is poor or there is black ice, the on-board computer calculates the optimum braking distance and displays the nearest available parking space when the destination is reached. This requires precise coordination of all road users and can only be achieved through a fundamental reorganisation of our transport system.

7. Two packages a month

The high-street retail trade is in dire straits, while online business is booming. Restrictions in the wake of the Covid 19 pandemic have reinforced this trend. Whether we welcome or regret this, the logistics industry at least is pleased. But it must first invest heavily to keep up with growth in demand. As a rule, demand for logistics space in online retailing is three times higher than in traditional distribution. According to the consulting firm McKinsey & Company, the global parcels business recently generated sales of more than 240 billion euros. Germany is in the top league globally: every German citizen receives an average of 24 parcels per year from online retailers. Only the Chinese are even more eager to place orders online, receiving more than 70 parcels per year.^[7]

The retail trade is changing rapidly, and with it demands on the logistics industry. The demand for new distribution centres is high.

Infrastructure company shares are usually not very sensitive to economic cycles. They can therefore lend a portfolio greater stability.

8. Renewable energy - more than just wind and sun

The automobile sector may currently be the focus of attention for slowing down climate change, but a general move away from fossil fuels such as coal, oil and natural gas is also necessary. Industry and households must follow suit. We are pinning our hopes on hydrogen, but this will require completely new infrastructure - from generation to distribution and storage – to be developed. Many countries are driving development forward with investment running into billions, so that by 2050 hydrogen could^[8] cover almost a fifth of the world's energy needs. In 2018, the German government, together with European countries, also concluded a hydrogen initiative. Realistically speaking, however, hydrogen is unlikely to break through as a climate-friendly energy carrier before 2030.

9. The Silk Road is alive and well

The first Silk Road dates from about 2500 years ago. It served as a trade route between China, Central Asia and the Middle East, and had an enormous impact on the region. The Belt and Road Initiative (BRI), also known as the "New Silk Road Initiative", launched by China in 2013, links into this historic continental route and extends it as far as Europe. In addition, a maritime Silk Road is to link China, South and South-East Asia, Africa and Europe by sea. Chinese companies‘ involvement extends across many sectors and is not confined to expanding transport routes. As yet, there is no concrete strategy paper for BRI with measurable goals and targets,^[9] but there can be no doubt about China's will to revive the Silk Road.

10. Why infrastructure is so special for investors

One of the most important reasons for investing in infrastructure is that the operators of the various projects are less subject to the economy’s ups and downs. The services they provide - water and electricity supply, constructing and maintaining transport routes and telecom services - usually benefit from relatively constant demand, regardless of the economic climate.

Other advantages also distinguish shares in this sector. These include reliable earnings, as infrastructure facilities are often designed to last for decades and some have state concession agreements. High entry barriers also make it difficult for new participants to break into the market. The greatest risk in the sector is that regulatory changes could fundamentally alter individual companies‘ business prospects overnight. However, if they are intelligently diversified, shares in infrastructure companies can stabilise any portfolio.

Infrastructure - 10 facts that every investor should know