Sarah Shaw

Despite economic and trade policy uncertainty and a disruptive geopolitical landscape, infrastructure assets remain well positioned heading into 2026, according to Sarah Shaw, CEO and global portfolio manager at 4D Infrastructure.

In 4D’s recently released Global Matters – 2026 outlook Shaw says there is a sense of ‘controlled uncertainty’ for investors at the start of 2026, but infrastructure remains one of the few asset classes offering both resilience and selective growth.

“Infrastructure allows diversification across user pays and regulated assets, meaning investors can take advantage of different opportunities across regions while still being cognisant of the nuances of political and monetary policies. Infrastructure’s blend of inflation linked revenues, contracted cash flows, and regulated return frameworks provides ballast for investors’ portfolios, while still offering cyclical upside where domestic demand, growth thematics and policy support are strongest.”

Looking ahead, Shaw says that globally, policy uncertainty, trade rewiring, and geopolitics is keeping risk levels for investors relatively high, but not decisively bearish, and solid global growth remains the base case.

“Overall, we believe there is sufficient growth to support earnings and investment plans, even if there are more potential policy surprises and variations between regions that will create further volatility in the global market,” she says.

AI, global trade, fiscal stance and geopolitics remain key economic themes for infrastructure in 2026, says 4D Infrastructure investment director, Tim Snelgrove.

“Investment in AI is set to continue to increase in 2026. It is estimated that in the US alone tech capex is forecasted to reach US$500 billion this year. This is driving a lot of construction-led activity in the market to accommodate the power capacity requirements needed to service increasing demand for AI. However, this narrative could quickly turn from tailwind to headwind if the availability and affordability of power, and debt funding models and returns get stretched,” Snelgrove says.

Trade and tariff uncertainty also remains, particularly for global supply chains.

“Peak fear in markets has passed following the introduction of President Trump’s tariffs in April 2025. However, the full implication of tariffs may only come into light this year, especially if existing transshipment workarounds are curtailed,” says Snelgrove.

In bond markets, term premiums are keeping long term bond yields high, despite the Fed continuing its easing cycle into 2026.

“The USD remains under pressure due to persistent policy uncertainty. In addition, the ‘TACO trade’ persists – as seen again last week on the matter of Greenland.

“Elsewhere, Germany’s fiscal loosening and heavier issuance has steepened bond curves, while Japan’s stimulus has pushed yields to multi decade highs,” he says.

Conflicts from the Ukraine to the Middle East remain potential catalysts, but the November US midterms will be a major focus this year, says Snelgrove.

“History suggests the sitting President’s party tends to lose House seats, and with a razor thin majority that raises the probability of a divided government. The question is whether the Trump Administration seeks to dampen volatility into November or escalates disruptive proposals,” says Snelgrove.

Despite these uncertainties, the case for global infrastructure assets remains strong, as it offers global, multi sector diversification, enabling active positioning by region and cycle.

“In a world of high term premiums, an uneven inflation outlook, and episodic policy shocks, we favour three broad areas in the market: regulated networks with approved investment roadmaps & constructive regulation across Europe, North America & EMs, selective user-pays assets in stable policy environments, and targeted emerging market exposure where regulation or long-term concessions provide insulation from macro volatility.”

“While near-term uncertainty will persist, we remain optimistic about the long-term fundamentals underpinning global infrastructure,” Shaw says.

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Sarah Shaw

The last two weeks have broken multi decade records for intraday equity market reversals and single day rallies. We have also seen heightened bond market volatility, a material repricing of US and global growth and inflation expectations, and increased Fed rate cuts priced in for 2025. Geopolitically, Trump has aggressively started to isolate America, while also maintaining attacks on China as a trading partner, effectively leading to a cutting of the majority of China – US two-way trade.

In this article, we will review the recent tariff developments and where we stand today, the potential impacts on the US and global economies, and consider the impact on global listed infrastructure sectors and stocks.

Background – Trump’s first two months in the White House

Tariffs and immigration were two cornerstone policies of Trump’s 2024 election campaign. Over Q1 2025, federal government policy ambiguity has been increasing as Trump postulated on tariff implementation, as well as uncertainties brought on by the implementation of DOGE cuts and immigration curbs. There was some optimism in February and March when Trump backpedalled on 25% Mexico and Canada tariffs with a one-month delay, and then carved out USMCA compliant goods, while he held firm on additional China tariffs, Auto tariffs and 25% Steel & Aluminium tariffs.

At the same time, US economic growth started to deteriorate, with retail sales and personal spending surprising to the downside, and weakness in sentiment with consumer and business confidence surveys losing traction. US consumer sentiment hit a 2.5 year low in March, and consumer inflation expectations hit the highest since 1993 (five year horizon inflation at 3.9%).

Shift in US Consumer sentiment and inflation expectations

So far, the labour market remains strong and corporate earnings have held up – in contrast to soft survey data. However, cost pressures have been increasing, seen in the S&P Global PMI in January and February, which leaves the Fed in a difficult situation of a weakening economy but elevated, and potentially increasing, inflation outlook. Manufacturing activity data, seen in the US ISM PMIs, slowed to contractionary levels in March, with an even greater deterioration in forward looking new orders. This suggests the uptick in manufacturing in January and February, to the highest in 27 months, was just a pull-forward of demand ahead of anticipated Trump tariffs and not a sustained pickup in industrial activity.

This economic deterioration in the US led the market to question the resounding ‘US exceptionalism’ thematic that has been in play since Covid, with a particular focus back to Europe. In the first quarter, the S&P 500 fell 2%, with a 7% drawdown from February highs while Europe rallied 7%. This shift was further fuelled by Trump’s undermining of the NATO alliance, which saw European leaders galvanised into a level of unity not seen in decades. This led to expansionary fiscal stimulus including defence spending at the EU level, a €500b German infrastructure and defence fund, and loosening of strict government fiscal restraints.

Positive Eurozone economic surprises while US surprised to downside

Obliteration Day

All these Q1 developments were the precursor to the main action of 2025: April 2, Trump’s so-called ‘Liberation Day’, which turned out to be ‘Obliteration Day’. This was the grand reveal of Trump’s tariff plan globally, after an extensive US Trade Representative (USTR) review of global tariff policy.

“This is the beginning of Liberation Day in America. We’re going to charge countries for doing business in our country and taking our jobs, taking our wealth, taking a lot of things that they’ve been taking over the years. They’ve taken so much out of our country, friend and foe. And, frankly, friend has been oftentimes much worse than foe.”
President Trump, leading up to April 2

In the weeks preceding ‘Liberation Day’, Trump flagged a 10% Universal Base Tariff, as well as hints around potential reciprocal tariffs – charging the same tariffs as other countries were charging the US. On April 2 Trump announced a national emergency to “increase the nation’s competitive edge, protect our sovereignty, and strengthen our national and economic security”, which enabled him to invoke the International Emergency Economic Powers Act (IEEPA) and enable him to issue an Executive Order on tariffs.

The announced tariffs were far more aggressive than most bear cases, with a 10% Universal Base Tariff (as expected), very high reciprocal tariffs on 27 countries and the EU bloc, as well as ending De Minimis exemptions (which allow duty free goods entry under $800 USD, typically from China and Hong Kong). To their great relief, Canada and Mexico were left off the reciprocal tariff list.

Country level Liberation Day Tariffs

Bloomberg estimated that the new effective US tariff rate would be 22%, 10 times higher than currently, and the highest since the early 1900s. Trump also left the door open to even higher (or lower) rates with “modification authority”, as well as excluding certain sectors by flagging additional sector-based tariffs to be announced imminently (pharmaceuticals, semiconductors, gold, lumber, copper). Several countries received the minimum reciprocal tariff of 10% including Brazil, UK, Singapore, Australia and New Zealand – as well as some inhabited by mere penguins and seals (Heard and McDonald Islands). The Nomura Research Institute noted:

“After World War II, the United States championed the promotion of free trade to prevent a repeat of past mistakes. However, the Trump administration is now significantly shifting this policy, threatening to dismantle the global free trade system. This shift will likely reduce economic efficiency and slow global growth.”

Cumulative change in US average tariff

The very hawkish tariffs, both in size and breadth, surprised the markets. There were no carve outs for companies or sectors that had given investment pledges to the US, nor was it certain that any negotiations would occur considering the short time frame till tariffs went live (under a week). The S&P500 and Nasdaq fell over 10% in the following days. Bond yields, after initially falling to below 4%, rallied aggressively with US ten year bonds hitting 4.5%, the steepest two day move in yields in two years. The increase in longer term yields, while shorter term yields stayed low with the expectations of more Fed cuts, was what was most troubling to the market – a repricing of the US term premium, with the market demanding a higher premium for the level of economic uncertainty, large fiscal debt and deficits long term. This was even more pronounced in an ever-isolating posturing by the US, potentially impacting demand for the USD and the ability to continue funding large deficits, which are funded substantially from foreign investors.

Vulnerabilities from proposed reciprocal tariffs

The level of retaliatory tariffs from other countries are expected to have a major impact on US trade flows, growth and inflation. China, whacked with a 34% tariff, retaliated with a 34% tariff. Trump then added another 50% tariff (to 84%) on Tuesday 8 April which China matched, encouraging Trump to go even harder and imposing a 125% tariff by Wednesday April 9. This took overall China tariffs to 145% since coming into office in January 2025. The reality is 84% versus 145% is quite irrelevant given trade between the two countries is likely to cease under either scenario. The Chinese finance minister indicated that it would ignore any further tariff increases from US on China-made goods stating that given there is “no longer possibility of market acceptance” for US goods to be exported to China, it will pay no attention to it”.

For reasons known only to himself, on April 9 Trump announced a 90 day pause on all reciprocal tariffs except for China, while maintaining the 10% UBT tariffs and sector tariffs. While this led to a large relief rally – the biggest single up move since 2008 in US equities – risks remain. The global economy, and the US, are not out of the woods yet. There remain many unknowns, economically and geopolitically, with both short and long term impacts. In particular:

• Minimum 90 days of tariff-led volatility and an inability for companies to make any forward strategic decisions in that time.
• The success of negotiations between countries and the US, particularly the heavily taxed ASEAN nations (that could absorb some Chinese exports).
• The level of sector and company carve outs (if any).
• A permanent elevated risk environment with continual policy uncertainty (which shows no signs of abating).
• Details on use of tariff proceeds, including the tax cut agenda and deregulation policies (which are both seen as pro-growth).
• Potential legal or Congressional challenges from the tariff process (not seen as likely, but could delay).
• The level of Trump responsiveness to market and/or real economy weakness (trigger levels).
• Investment willingness given levels of uncertainty, near term and over Trump’s term.

The macroeconomic impact of tariffs on countries – Scenarios

In our November 2024 News & Views “Tariffs: The impact on Infrastructure”, we stated “On their own, tariffs are broadly negative for US growth, boost inflation and put the Fed on hold (or on a slower path down).” The Liberation Day announcement led to much more aggressive downgrades of US growth, upgrades to US CPI and a bring-forward of Fed cuts.

• The market moved from two cuts in 2025, to five for the Fed – which would grapple with managing its dual mandate just as CPI increases and the outlook for the labour market (and growth) weakens.
• Most investment banks cut GDP forecasts to 1-2% for 2025-6 and added 2% to US CPI to 3.5-4% levels. The increase in inflation would hit household income and consumption, which would have a larger impact than any potential Trump tax cuts.
• US recession odds, priced by the market and forecasters, increased to 40-50%. Key transmission channels in the economy from the tariffs are household consumption (lower real disposable income), and lower business sentiment (lower capex and hiring).

Of course, post Trump’s 90 day pause of reciprocal tariffs, a lot of these worse case downgrades may be pared back as Trump steps away from the brink. However, we broadly see three scenarios of tariff outcomes and their respective impact on macroeconomic outlook.

The impacts on regional economies are highly dependent on upcoming negotiations. However, we do know that certain economies are more hamstrung based on structural elements of their economy and import/export mix, while others have a greater ability to threaten (or impose) retaliatory tariffs. This includes those countries with a low export mix to the US and a low % of GDP, as well as those with immaterial US imports. China and Europe have the most leverage to fight back, according to the Wolfe Leverage index.

Wolfe Leverage Index – Who has the most leverage to fight back?

A brief summary of main impacts of tariffs across the globe:

In addition to the uncertainty brought on by the 90 day pause and where tariffs may settle, there are also longer term and structural impacts that must be considered, namely:

• There will be a complete re organisation of global supply chains between US and China, and a trend away from the US regardless of the scenario that eventuates (ie an ‘isolated America’). New capacities built onshore can only service onshore demand.
• Risk of loss of confidence in the US Dollar and less demand for US treasuries, which may impact capital flows and funding their fiscal deficit.

Impact on global listed infrastructure

Infrastructure has characteristics which support long term visible and resilient earnings streams. These characteristics should prove attractive relative to broader equities in very uncertain economic and geopolitical environments. Further, infrastructure is quite unique in that within our universe, we have macro diversity as well as regional diversity. As such we can actively position a portfolio with consideration of in-country macro drivers to fundamentally weather the evolving economic and geopolitical environment. That is not to say however, that this environment poses no threat to the asset class. In our November 2024 News & Views “Tariffs: The impact on Infrastructure”, we stated:

“Infrastructure stands at the crossroad of global trade – ports allow for the movements of goods across the seas, while goods are moved from ports to demand centres by railway and road infrastructure. Tariffs also have a potential impact on countries’ growth and inflation outlook, which impacts the macroeconomic variables driving infrastructure’s long-term return outlook.”

Trump’s Liberation Day announcements were detrimental to pretty much every segment of the market, including infrastructure, with few absolute winners within our universe. On a relative basis, we expected infrastructure to be more resilient but the economic consequences would have been felt. Thankfully, by implementing a 90 day pause and indicating a willingness to negotiate directly with countries, it would appear Trump has stepped back from the most extreme action, increasing the likelihood of our base case (above) eventuating, a clear improvement on the Liberation Day worst case outcome (bear case above).

Relative impact per infrastructure sector

The impact to infrastructure is very nuanced and we will publish detailed analysis on each sector in a later piece. However, in summary, the relative attractiveness of sectors/regions within the infrastructure universe are summarised below for our base case and again for the bear case – should the situation deteriorate.

Relative exposure (red) versus relative protection (green) within the listed infrastructure universe

Broadly speaking a deterioration of our base case to the bear case would lead to more pronounced negative outcomes among key sectors including:

• US: Rail is impacted the most (with intermodal the most directly linked to trade and weaker domestic consumption), while Renewables are impacted by offshore supply chains and uncertainty over IRA repeals. Utilities are impacted by some pull back in growth expectations (AI upside), but generally should have resilient earnings even in recessions. However, the Fed quandary of cuts versus hikes, and the steepening of the yield curve, puts Utilities and Renewables most at risk.
• China: Ports are most heavily impacted (changing trade patterns), particularly as related to the ASEAN relationship, while Airports will be impacted by an international spending slowdown. The level of fiscal support should offset some impact on overall GDP sensitive sectors, such as Toll Roads, while Electric & Gas utilities with the highest industrial exposure will feel the greatest impact.
• UK/Europe: Impacted to a lesser extent, with the internationally exposed businesses hit most but still relatively better off than the US and China (ie international passengers at airports, offshore renewable investment plans). Also, could benefit from a reallocation of trade.
• LatAm: Brazil and Mexico very different players in these trade wars. Brazilian toll roads, rail and port companies exposed to potentially higher commodity demand from China could benefit while those airports that are predominantly domestic traffic are more protected. Brazilian utilities could also benefit from a shift in data centre demand onshore given issues facing the US. By contrast, Mexican rail is highly exposed while the airports are fragmented based on relative exposure to US versus domestic passengers/cargo, exposure to Mexican onshoring and associated FX implications.

It should also be noted that we believe a negative infrastructure outlook should still be relatively better than many sectors in the market, where earnings are not underpinned by the key characteristics that makes infrastructure resilient (monopolistic, contracted or regulated, inflation hedged).

Conclusion

In our 2025 Outlook piece we commented that predicting Trump’s every move was “a fool’s game”. Sadly, that has proven to be true with recent actions creating significant market and macro uncertainty. Unfortunately, we see no great clarity over Q2 with Trump’s actions highly unpredictable.

Fundamentally, infrastructure earnings should hold up relatively well, however, we recognise that there are many near term sector nuances. In this piece we have tried to articulate the high level risks and opportunities across the globe at a macro level and the relative attractiveness of sectors/regions within our infrastructure universe.

While the situation remains very fluid, our recent analysis supports our current overweights to Europe and parts of Latin America and an increased appreciation of defensive sectors with strong yields. We will continue to monitor the global macro, regional and sector impacts and position the portfolio accordingly within the highly diverse infrastructure universe.

By Sarah Shaw, global portfolio manager and CIO

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Sarah Shaw

Despite economic uncertainty in the US and globally, with a new Trump presidency and the potential impact of tariffs, a solid foundation underpins infrastructure investments which will continue to deliver attractive returns for investors, says Sarah Shaw, global portfolio manager and CIO with 4D Infrastructure.

“So far in 2025, we see a moderating growth, inflation and rate outlook, with Trump 2.0 as the main wildcard for markets. For the US, while Trump’s core policies are pro-growth there is now a greater degree of uncertainty, bigger downside risk and a wider range of possible economic outcomes,” Ms Shaw said.

“Trump’s main campaign policies and threats are known, that is, tariffs, taxes, immigration and deregulation. However, as we’ve seen in the past week regarding tariffs, the degree of implementation and timings remain fluid. Medium term, these initiatives could see a scenario of higher nominal US growth, elevated inflation, and favourable domestic drivers for corporate earnings, but tempered by the potential downside risks from global trade tensions and geopolitical instability.” 

Most concerning are Trump’s tariff plans, which Ms Shaw says are at the headline the largest tariffs since the 1930s, and customs duties seven times those of the Trump 1.0 trade wars of 2017-19. 

“These headline tariffs, if implemented as suggested, could have a stagflationary impact on the US economy, leading to lower growth and higher inflation at the same time.

“However, there is a very wide range of potential outcomes. Tariffs are a tax on imports, which will slow economic activity as demand slows. Firms may pass on tariff-related expenses to the end consumer, resulting in a kick-up in inflation,” she said.

“This will add to geopolitical uncertainty. Tariffs are likely to be used as weapons of foreign policy, and the level of retaliatory tariffs could also have significant economic and geopolitical consequences. These have the risk of flowing through to renewed supply chain disruptions, which could bring upside risk to inflation globally,” she said.

Despite these uncertainties, Ms Shaw is optimistic about the long-term fundamentals underpinning infrastructure companies. 4D Infrastructure is positioning its portfolio to capitalise on long-term growth dynamics in the infrastructure sector, which include developed market replacement spending, population growth, the rise of the middle class in developing economies, the clean energy transition and rise of technology.

4D is targeting companies globally, with assets across developed Asia, Europe and North America, as well as emerging markets offering appeal. 

“With market and economic trends currently diverging, certain regions offer greater relative value at present, and we are positioning for this. With the risk and opportunity of Trump incorporated into forecasts, we start 2025 overweight Europe and emerging markets with selective positioning in the US awaiting greater clarity. Overall, infrastructure remains an attractive asset class for investors, given its unique characteristics such as inflation pass-through, resilient earnings and exposure to long-term growth,” she said.

“We will be monitoring regional economics and politics closely and positioning ourselves to best weather these at an in-country level.”

4D is increasingly wary of sectors and companies that have run ahead of fundamental value on sentiment and/or ‘blue sky’ value while also limiting exposure to sectors/companies involved in political machinations such as US offshore wind.  

By contrast, they have increasing conviction in companies and sectors that were oversold in 2024 including Brazil, parts of China & European assets. 

“European and UK utility investment plans look particularly attractive as they are supported by strong sector growth thematics. European user pays also continue to offer value. While volume growth is mitigating, it remains solid, and the strong cash generation and growing shareholder returns are attractive in the current muted economic environment,” Ms Shaw said.

“We also remain selective in our exposure to China, capitalising on those names that can benefit from any stimulus as well as a slowly recovering sentiment,” she said.

“In Latin America, Mexico is at risk of Trump 2.0 and we are limiting exposure to those names that have low exposure to tariffs, can capitalise on a weakening currency and are not on the radar of the new Mexican government, namely the airport space. 

“In Brazil, growth and inflation expectations surprised to the upside in 2024 and the reversal of the rate trajectory to a tightening territory amid fiscal policy concerns had a significant impact on sentiment for the infrastructure names. As a result, 2024 was a very weak year for Brazilian infrastructure equities which is at a complete disconnect with fundamentals – they all have an inflation hedge and many a GDP link which were both very supportive.

“Elsewhere around the globe we continue to monitor geopolitical risk and opportunity, the economic outlook as well as capitalise on long term, structural growth thematics that underpin the infrastructure investment story,” Ms Shaw said.

By Sarah Shaw

The post Solid outlook for infrastructure investment in 2025 despite Trump uncertainty appeared first on AdviserVoice.

Sarah Shaw

The new Trump Administration in the US is a major wildcard for the year ahead, both economically and geopolitically, with implications home and abroad.

Whilst Trump’s main campaign policies and threats are known (tariffs, taxes, immigration, deregulation), the degree of implementation and timing are still fluid.

Overall, these factors suggest a scenario of higher nominal U.S. growth, elevated inflation, and favourable domestic drivers for corporate earnings, tempered by the potential downside risks from global trade tensions and geopolitical instability. Outcomes are very uncertain with higher downside risk. 

Tariffs

The impact of tariffs is stagflationary on the US (lower growth and higher inflation) but there is a very wide range of potential outcomes. Tariffs are a tax on imports, which will slow economic activity as demand slows. Firms may pass on tariff related expenses to the end consumer, resulting in a kick up in inflation; however, this may be short-lived if tariffs are reduced in the future.

The timing and size of tariffs are still uncertain, as is the degree of bilateral negotiations and sector exclusions. The current headlines are opening gambits and form part of Trump’s broader negotiating strategy, all with the aim of increasing FDI and manufacturing activities into the US. Trump’s biggest targets are those countries with large goods trade surpluses with the US, which include China, Mexico, Canada and Europe. 

We expect a China tariff to be implemented in late 2025, with a universal baseline tariff (UBT) in 2026, but with several exclusions and amendments in place. There is less clear footing on the implementation of the UBT and there is the widespread expectation based on input from Trump advisors that Trump will use the threat of the 10% tariff to negotiate concessions with major trading partners, rather than imposing them indiscriminately. 

It is important to consider how US trading counterparties react to tariff proposals and negotiations (e.g. Australian permanent exemption from Trump’s 25% steel/aluminium tariffs in 2018).

As to impacts on countries, a 10% UBT will hit Europe 0.5-1% GDP growth, with the biggest hit in Germany. Trump has also proposed larger tariffs on European autos, further hurting Germany. Weaker exchange rates will act as a safety valve for EM exporters facing US import tariffs. The biggest impact in the EM is on Mexico (0.5% GDP) due to its supply chain integration with the US. Longer term manufacturing orientated EMs (Vietnam and Mexico) could benefit from a shift by Western firms pulling production out of China. The first trade war had little impact on aggregate export performance in China, as third party countries replaced US destinations and with CNY depreciation. This time round, any weakness should be met with additional Chinese stimulus in line with its gradual approach of stimulus and meeting annual growth targets.

Deregulation – Energy and IRA
 

Trump’s campaign trail was pro fossil fuels and against renewable build out.
Trump is supportive of domestic oil and gas production, as well as undoing Biden’s pause on new LNG export terminals. The pause only applies to projects that would come online at the end of the decade, so the effect on natural gas prices will be negligible in the short term. Several liquification terminals, that already have approval to export, are scheduled to begin operations over the next few years.

By contrast, Trump has threatened to repeal the Inflation Reduction Act (IRA), but there is a high degree of unknowns as to what and how much can be done. A full repeal is less likely because of the large amount of IRA related investments made in Republican dominated districts. According to the Department of Energy, of the total spending on clean energy technologies since 2021 (as of mid-2024), ~$10.9 billion was for solar in red states and $4.1 billion in blue states, spending on batteries was $109.9 billion in red states and $22.0 billion in blue states, and spending on EVs was $35 billion in red states and $4.2 billion in blue states. However, it is clear that the near term rhetoric is negative with comments such as “no windmills” impacting sentiment.

Immigration

Trump’s threatened immigration agenda is very aggressive, including deporting 15-20 million people immediately and stricter border controls. Trump will most likely repeal Biden’s “humanitarian parole”, which is bringing in 75 thousand people monthly into the US with the ability to work after 30 days – this will cut off a major source of labour force growth and be potentially inflationary. Immigration has been an important tailwind to recent US growth having been about 2 million above trend in recent years. Net immigration reducing to near zero and deportations of undocumented migrants should reduce the US labour supply by 0.1-0.2%. It is also important to note that Trump 1.0 ran on mass deportations, but the pace of his deportations were actually lower than Obama.

Taxes

Trump’s other policies are domestic growth focused, with tax cuts giving consumers further tailwind and a push to re-invigorate the domestic manufacturing base and re-shore facilities back to the US. The negotiation around the 2017 Tax Cuts and Jobs Acts (TCJA) looms large in 2025, and the potential economic impacts on fiscal policy are more likely to be felt in 2026.

These tax cuts are at the cost of widening the fiscal deficit and estimated to add nearly USD $5-10 trillion to overall debt over the next decade, even with the offsetting gains from government efficiency and tariffs. Rising net interest payments continue to increase and there is little fat to cut from the budget (only 14% is discretionary non-defence spending to trim) – this could lead to discomfort in the bond market.

 The bond market is likely to be more important to Trump 2.0 considering the current levels of debt and intended fiscally expansive policies. Ahead of his first win, the 10-year treasury yield was ~1.8%, the US federal deficit around 3% of GDP, and the outstanding debt ~75% of GDP. Today, those numbers are ~4.4% on Treasury yield, and ~7% & nearly 100% of GDP, respectively. There is a risk of the ‘bond vigilantes’ returning to the US should the fiscal deficit and trajectory get reckless.

Timeframe and risks

Considering the many parts of Trump’s agenda, a number of conflicting dynamics mean there is a wide range of distribution of risks around outcomes, with what we believe a fatter tail risk to the downside.

We expect a focus on immigration in the first 100 days (border security, deportations, reverse Biden’s humanitarian visas). There should be tariff noise all of 2025, with China tariffs implemented in the second half of the year and UBT introduced in 2026. Tax cuts should be extended by the end of 2025.

There are still some controls over Trump’s policies, which should rationalise outcomes. His immigration and tariff plans can largely be implemented through executive action, whereas his regulatory rollback can proceed more rapidly with Congressional cooperation, and his tax plans are entirely dependent on Congress. Congress controls the US budget, and has sole authority to pass legislation (required for tax cuts). Even a Republican sweep will exercise a level of control, even on the most extreme aspects of policies (e.g., a Republican Senate did reject extreme Fed nominees in Trump’s first term).

By Sarah Shaw, CIO and Tim Snelgrove, investment director)

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Michael Buchanan

In its most recent analysis, Western Asset, part of the Franklin Templeton group, highlights its base case calls for further weakening of global growth and further declines in inflation with a greater emphasis on services disinflation.

“Goods price inflation is running modestly below pre-pandemic levels, but with ongoing deflationary pressures from Asia, it’s hard to see a meaningful persistent uptick going forward. Services inflation remains elevated, but wage pressures are abating as job markets soften and service sector demand is slowing. Headline inflation is close to target in most advanced economies, which has allowed central banks to reduce policy rates as their inflation concerns lessen while growth concerns rise,” notes Western Asset chief investment officer Michael Buchanan.

Growth is slowing in the US and remains moribund in the rest of the world. At the same time lower policy rates and the recent Chinese stimulus package should lessen recessionary fears.

“We remain overweight to interest-rate duration, but less so as rates have fallen, and markets have moved closer to our base case. Spread sectors have performed well and we expect this to continue if the downward growth trajectory remains gentle and services disinflation continues. However, valuations have less yield advantage now to offset potential macro and political risks going forward. Emerging market (EM) debt appears to remain attractive fundamentally, but both internal and external political risks have hampered performance in some countries.”

“In Australia progress on inflation remains slow, but there are signs of progress with the labour market loosening and wages growth rolling over. The RBA remains hawkish to encourage restraint, but we expect the conditions to allow them to start a shallow easing cycle in early 2025. Growth is slow, but tax cuts from mid-year will help to rebuild buffers.”

Read the report.

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Despite some challenges, infrastructure investment is essential across the US.

The upcoming November election has dominated the US media headlines, with the contest expected to be tight. Anecdotal conversations with management teams at the time indicated domestic concerns mirror international concerns – whether either President Joe Biden or Donald Trump were fit for office, and the impact their policies could have on economic progress, as well as the clean energy transition. President Biden has since announced he will not run for a second term, and the Democrats have nominated Kamala Harris as the party primary to run against Donald Trump.

While the Democrats are focused on supporting the energy transition and supporting working class jobs through the continued onshoring of select industries back to the US, Donald Trump is focused on supporting the exploration and production of traditional fossil fuels, reducing regulation and red tape, and extending tax cuts he implemented in his first term. Tax rate reductions are scheduled to expire in 2025, but it is widely expected that Trump will fully extend the tax cuts he previously implemented, while his election opponent in Kamala Harris will also extend components of the reductions, both putting upward pressure on budget deficits and inflation.

In terms of trade restrictions, the Democrats are likely to maintain tariffs on select Chinese goods and support the onshoring of manufacturing back to the US. Trump has communicated the more aggressive position for a universal tariff of 10 per cent on all imports, and 60 per cent on Chinese goods. The economic impacts of this could cause stagflation for the US economy, a real fear among economists.

Turbo charged load demand to favour infrastructure

For the first time in decades, many electric utility companies expect rising power needs, driven by several factors including population growth, on-shored manufacturing, especially from technology companies supported by the US Chips Act, and electrification in the transport, space heating and the oil/gas industries. Data centre demands and the rising energy needs of artificial intelligence (AI) is also a recurring theme.

Questions centre around whether utilities maintain their guidance of growing earnings at 4 to 8 per cent a year, or whether increased load demand will push this higher. The resounding feedback we hear from utility management teams is that increased load demand growth is expected to support the investment proposition of utilities, not change it. Companies are more likely to hit the higher end (or just above) their earnings growth guidance ranges but are unlikely to significantly change their long term guidance to the market.

Management teams are cautious about data centre energy demand. It is felt that some communicated demand from big tech companies developing data centres such as Amazon, Meta, Microsoft and Google may not eventuate. If utilities make investments to facilitate that expected load, and it doesn’t eventuate, the cost of that investment would be spread over the remaining customer base, negatively impacting affordability of regular residential customers. This is a major concern for both regulators and utility companies.

The impact of environmental policy on utilities led energy transition

Donald Trump has also communicated that he intends to repeal Biden’s Inflation Reduction Act (IRA) which supports renewable energy sources, and electric vehicles (EVs) through tax credits. Commentators suggest he may only repeal components of the bill such as support for EVs.

Trump has instead communicated the intention to support drilling for traditional fossil fuels in oil and gas, potentially through streamlining the permitting process for drilling and pipeline development. This would be supportive of investment in midstream infrastructure companies which transport oil/gas from production wells to demand centres. Gas pipelines are perceived as central to supporting the intermittency of renewables in the energy transition process.

This policy changes by Trump could be detrimental to companies investing in the clean energy generation, as well as the electric utility sector. Most electric utility management teams have communicated a desire and ability to deliver their generation plans under either the Democrats or Republicans in government. This is based on focusing on the economic benefits of renewable generation for customers, and delivering in line with state based legislative mandates.

The need for asset replacement and hardening to support reliability and safety

Reliability is potentially the key focus of legislators and regulators across the US. Ensuring electricity and gas supply is not only essential for business operations, and therefore economic growth, its demanded by all customers and therefore a sensitive political issue. Regulators demand reliability performance of electric and gas utilities, and are supportive of investment to facilitate it. Companies are replacing aging infrastructure, as well as adopting modern technology to support maintaining/improving reliability in ever increasingly difficult environmental conditions.

Reliability and safety investment for utilities is focused on replacing ageing assets, but also hardening the network against the increasing frequency and ferocity of natural disasters, such as wildfires and tropical storms. This is to ensure that electricity networks don’t ignite fires, causing massive legal liabilities for companies, and to reduce damage and network interruptions in the case of tropical storms. Over recent years wildfire liabilities have forced at least one utility into bankruptcy, causing significant disruption in the delivery of service to their customers, and wiping out shareholder value.

With increasing demand for baseload power generation through gas, and increasing concerns around energy reliability, the environmental focus on reducing gas utilisation has subsided. Gas utility management teams have outlined anecdotal evidence from discussions with regulators that they understood that gas networks would be around for decades, and the investment in them will be maintained for the foreseeable future. Importantly, regulators across US states still largely support the replacement and modernisation of gas networks, to ensure safety and reliability for customers.

Allocating to assets in the region

As the markets wrestle with the timing and magnitude of interest rate cuts, this will no doubt feed into US infrastructure valuations over the second half of 2024 and into 2025. The fear that politically motivated fiscal policy could ignite inflation and put upward pressure on interest rates again is a risk to valuations. In addition, markets currently believe there is roughly a 50 per cent probability that the US economy encounters a recession. The earnings resiliency of infrastructure stocks would be appreciated by investors as compared to other sectors if a recessionary scenario plays out.

Despite some challenges, infrastructure investment is essential across the US. This investment should support consistent, predictable earnings growth for investors over the long term, with the defensive qualities of infrastructure likely being favoured by investors.

By Peter Aquilina, portfolio manager – sustainability

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Sarah Shaw

Despite ongoing global political and economic headwinds, the value proposition of quality infrastructure projects in some Asian nations is very attractive, according to Sarah Shaw, global portfolio manager and CEO/CIO at 4D Infrastructure.

The rise of the middle class remains a core theme across Asia, coupled with a global desire for a greener future and increasing usage of technology, which makes for a huge infrastructure investment opportunity across the region, said Ms Shaw. Conversations with management teams from regulated utilities, communications and transport companies in Indonesia, Malaysia, Thailand, Hong Kong and China reaffirmed this view.

“Rapid population growth and the expanding middle class in Asia is driving the need for infrastructure. As personal incomes rise, so does the expected standard of living, triggering a demand for essential utilities – such as clean water, waste services and power – and progressing to services that support efficiency and a better quality of life, such as roads, airports and communication.

“From an investment perspective, infrastructure investors can capitalise across the entire value chain.

“In the toll road space both passenger and heavy vehicle travel momentum are supported by a growing middle class and improving economic outlook. Further, the opportunity for more growth in the sector provides additional potential upside – roads are core to the economic evolution happening in Asia right now. We favour Indonesian toll road operator Jasa Marga and the Chinese operators exposed to the relatively resilient Tier 1 cities such as Shenzhen International,” she said.

In terms of airports, Asian traffic is recovering after a slower start to the post COVID rebound than that experienced by developed nations.

“Both in-bound, out-bound and domestic traffic momentum remains buoyant, supporting both economics and infrastructure names. In particular, we like the airports in Malaysia and the airports of Thailand, with growing levels of tourism.”

In terms of communications, while the opportunity set of 5G and data is universal, the ability to capitalise on the growth of technology varies across Asia.

“We favour Mitratel in Indonesia who has the geographic footprint, asset quality, balance sheet and strong management team to truly capitalise on the opportunity,” Ms Shaw said.

In terms of the global opportunity set of a greener future, the 2050 target of Net Zero is impossible without the emerging world, and in particular Asia investing in the theme.

“The opportunity set for infrastructure investors to support the energy transition is huge and within Asia we are capitalising on this through investments in the grids as well as the water sector, both of which require growing levels of investment.”

In terms of investment, infrastructure offers investors defensive and resilient earnings but with significant potential for growth given the huge and growing need for investment globally.

“This is due to a chronic underspend on infrastructure globally over the past 30 years as well as the changing dynamics of the global population.

“Like most investors, of key importance to our investment decision is fundamental value, total return and quality. As always, we maintain a diversified portfolio of high-quality infrastructure names globally, and at the moment, believe parts of Asia are offering an attractive mix of quality and value,” Ms Shaw said.

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Despite renewable deployment continuing to accelerate, investors are starting to put more value on the visible, sustainable growth grids offer alongside the more immediate returns on capital.

When talking about the energy transition, naturally, the focus has been on renewable energy. Many an article has been written on the exponential growth in wind, solar and batteries driven by increasing power demand, fossil fuel replacement, and societal concerns driving government and corporate targets towards net zero.

The focus on renewables has thus always overshadowed the complementary need for investment in electricity transmission and distribution networks. This is despite grid operators long being vocal about the importance of accelerating investment to adapt to these essential changes in power generation and energy consumption.

Networks lagging generation in the race for net zero

It’s estimated that over 80 million kms of grid infrastructure will need to be added or refurbished worldwide by 2040 if countries are to fulfil their national climate commitments on time and in full – equivalent to double the length of existing grids^[1]. Currently, only 20% of the $770b USD invested into clean energy goes into network investment^[2].

Investors have focused more on renewables given the outsized attention and higher perceived growth prospects.

Renewable companies have marketed their sizeable growth pipelines, whilst utilities as owners of transmission and distribution grids, were more constrained by regulators and policy. They needed to be more prudent in their growth assumptions given their defensive position in the market, and with concerns around affordability.

Until recently, the low-rate environment supported this thesis, with the market willing to pay more for longer duration renewable growth. However, in the past couple of years, there has been a shift in investor thinking.

Improving policy has supported network investment

Regulators, governments, and policy makers have started to appreciate the importance of, and urgency with which, network investment needs to happen for the energy transition. This has translated into improved regulation, more attractive investing regimes, and overall better policy.

These changes have seen a materially improved outlook for most (if not all) European utilities with electricity networks exposure. This trend has accelerated in recent months and can continue to accelerate further with ongoing electrification and generative AI-related power demand, which is only just gaining traction in Europe.

Some of the recent developments include:

• November 23 – UK utilities, National Grid & SSE (both in the 4D fund) increased their five-year capex plans from £40 to 42bn and £18 to £20.5bn respectively due to greater visibility provided by the UK’s Accelerated Strategic Transmission Investment framework.
• March 24 – German distribution network operator E.On significantly upgraded its financial targets driven by an increased five-year investment programme – from €33bn to €42bn (up ~30%)^[3].
• March 24 – Iberdrola delivered their new business plan, surprising the market with further upgrades on an already significant 10 year/€150bn investment program driven by more transmission network investment.
• March 24 – Italian transmission network operator, Terna, increased its five-year investment plan by 65% compared to its previous plan.
• March 24 – France’s electricity transport network operator, RTE, is expecting €100bn of electricity transmission investment from 2025 to 2040, compared to a previous plan of €33bn of investments over 2021 to 2035.
• Networks have become more attractive than renewables in a higher rate environment

Despite renewable deployment continuing to accelerate, investors are starting to put more value on the visible, sustainable growth grids offer alongside the more immediate returns on capital.

While we invest in both pureplay renewables and network companies, our preference in recent years has been to gain exposure to renewable developers through integrated regulated utilities. These are utilities that operate across the value chain in power generation, networks and in energy supply. We like the higher quality and often diversified (both in terms of renewable technologies and geographies) development portfolios of these companies, along with economies of scale which often provide supply chain advantages allowing for higher returns.

Additionally, our research indicates that the market has undervalued and underappreciated both the scale and longevity of growth in their complementary network businesses – which, as mentioned, is only beginning to get more attention and support from governments, regulators, and operators.

Capital flexibility in balance sheets, along with the ability to sell / hedge the power generated from renewables directly to retail customers, also provides us with an added level of comfort.

Even with the recent outperformance of networks versus renewables, the table below highlights the ongoing disparity between valuations and market multiples across these two sectors.

Integrated regulated utilities are allocating more capital into networks

As the renewables sector has suffered from inflation, cost of capital and power price challenges, we’ve seen integrated utilities (include some aforementioned) shifting more investment into networks.

One of the clearest examples is from Iberdrola – one of our core utility holdings. Iberdrola is an integrated utility operating across power generation, networks and supply in Europe, the Americas and Asia. It’s one of the largest renewable developers and network operators globally, and therefore inherently linked to the energy transition.

Recognising the challenges in renewables versus the improving outlook for grids – Iberdrola in its 2022 Capital Markets Day started to pivot more towards networks. This foresight and capital allocation flexibility has proved timely.

The company doubled down on its network focus in its March 24, taking advantage of policy tailwinds for networks in the UK and US, and reducing its exposure to some of the renewable energy headwinds currently at play (high rates, value creation concerns, supply chain issues, US offshore wind troubles).

In doing so, the company highlighted the need to double global annual network investment by 2030 versus 2022, and triple investment by 2030 to work towards global net zero emissions targets^[5].

Additionally their analysis revealed the massive long-dated needs for networks, with every 1 euro of renewables spend requiring 1 euro of network spend, and an even higher 1.25 euros in advanced economies^[6].

This timely pivot is but one of the reasons we rate the quality of Iberdrola so highly.

Utility underperformance provides for greater long-term opportunities

While this growth outlook is unparalleled, the European utility sector has still underperformed the broader market, albeit considerably less than the pureplay renewable companies.

Even with these massive growth drivers, the fact remains that utilities are considered a bond proxy and in a high-rate environment with a high opportunity cost of capital, it’s difficult for these stocks to outperform. Strong economic data supporting cyclical growth and tech / AI-related trends have amplified this underperformance.

While the market currently favours cyclicals over defensive growth, we have used this as an opportunity to increase our positioning in high quality network-focused utilities, such as Iberdrola, National Grid, ENEL and SSE. We believe these are all strong investment propositions given their long-dated defensive growth profiles with a secure regulated returns, which despite increased attention, still aren’t being fully appreciated by the market.

By Tasneef Rahman, senior investment analyst 

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Notes:
[1] https://www.iea.org/commentaries/the-clean-energy-economy-demands-massive-integration-investments-now
[2] https://www.iea.org/commentaries/the-clean-energy-economy-demands-massive-integration-investments-now, EMDE refers to advanced, emerging, and developing economies
[3] Total five-year investment plan 2024-28 compared to 2023-27
[4] 4D Infrastructure, FactSet
[5] Iberdrola Capital Markets Day 2024, IEA
[6] Ibid.

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Tim Snelgrove

Central bank interest rate cuts are a tailwind for infrastructure assets, especially parts of the utility sector which has been hard hit by the sharp rise in interest rates, according to Tim Snelgrove, investment director with 4D Infrastructure. 

While Mr Snelgrove expects interest rates to remain higher throughout the first half 2024, he expects central banks across the developed world to be cutting in the second half of the year given the recent cooling of inflation and a slowing global growth outlook. In the last month the market has started moving towards a similar expectation having started the year too optimistic on the quantum and pace of cuts. 

“We feel the market may be too aggressive with over 150 basis points of cuts priced in at the end of December for the Federal Reserve, European Central Bank and Bank of England. Considering higher structural inflation and budget deficits, long bond rates should remain elevated, at more than 3.75 per cent to 4 per cent for 10-year Treasurys.  

“Any official interest rate cuts, however, would support infrastructure assets, especially utilities. We expect interest rate cuts to start in the second half of the year and lower rates will support long duration infrastructure assets, which we forecast will continue to enjoy strong earnings growth, driven by multi-decade thematics,” said Mr Snelgrove. 

4D Infrastructure notes five long-term growth dynamics that are completely immune to short-term events. Developed market replacement spend, global population growth, the emergence of the middle class, the energy transition and the rise of technology are all underpinning infrastructure investment, positioning it well for the long term. 

According to Sarah Shaw, global portfolio manager and CIO of 4D Infrastructure: “Many developed nations need to replace old and inefficient infrastructure. Separately, robust global population growth in emerging nations is forcing up infrastructure spending. The emergence of middle classes too in developing economies like India and LatAm offers a huge opportunity with infrastructure, both as a driver and a first beneficiary of improved living standards.” 

The transition to renewable energy is another tailwind for the infrastructure sector. “While the speed of ultimate decarbonisation remains unclear, there appears to be a real opportunity for multi-decade investment in infrastructure as every country moves towards a cleaner environment,” she said.  

The rise of technology is also supporting rising investment in infrastructure. “The explosive growth in data consumption is fueling significant investment opportunities for infrastructure owners globally. Artificial intelligence and cloud computing, for example, demand huge infrastructure investment to support their growth.” 

In terms of individual markets, Ms Shaw believes certain regions offer greater relative upside at present. 

“We have started the year overweight in Europe and emerging markets. We also see opportunities in China given equities are trading at a historic valuation discount.  

“Continued policy support remains the upside risk for China in 2024. While it’s hard to see a quick fix for China given the challenges facing the property sector, along with the trust sector and shadow bank issues, increasing savings rates and weak confidence, the market has priced this in and valuations look very cheap,” Ms Shaw said.  

Robust travel momentum also remains a positive for infrastructure. “Travellers seem willing to give up other forms of discretionary spend amidst cost-of-living pressures in order to continue investing in travel and associated experiences. While we expect the pace to slow, we continue to position for solid travel demand into 2024,” she said.  

Ms Shaw also sees a growing opportunity in the North American utility space.  

“This sub-sector has been the most adversely impacted by the rate environment. As such a reversal in rate trend is expected to be a catalyst both in terms of fundamental earnings and market sentiment. We are watching this closely” said Ms Shaw.  

Some short-term challenges, however, remain on the horizon. The ongoing Israel-Hamas and Russia-Ukraine wars, and the China-Taiwan conflict, could all impact markets in 2024.  

“These continue to have potential impacts on agricultural and energy markets.  The Israel conflict is set to become a bigger issue if it is not contained to Hamas, Gaza and Hezbollah. If Iran has any direct role, it could impact oil prices much more, both directly and via trade through the Strait of Hormuz which is already under heightened alert,” she said. 

Separately, with so many elections around the globe in 2024 and rising populism, these are risks for economies and investors.  “With elections, comes the rise of the populist rhetoric. From an economic perspective, the key issue is that populism leads to the development and attempted implementation of poor economic policy. 

“We remain conscious of the volatile economic environment as well as the 2024 political overhangs, and we’re positioning accordingly. However, macro uncertainty and geopolitical tensions can also create unjustified market volatility and noise. We look to separate the resilience of the infrastructure asset class from this noise, and we remain optimistic about the long-term fundamentals underpinning the infrastructure investment case,” Ms Shaw said. 

4D prioritises investment in infrastructure companies with strong leadership, defined strategic goals that integrate with a sustainability policy, strong balance sheets and those that are best-in-class within their sectors. “We believe that with active management, a listed infrastructure equity portfolio can be positioned to take advantage of the long-term structural opportunity, as well as whatever near-term cyclical events may prevail – whether they be environmental, political, economic or social,” Ms Shaw said. 

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With elections comes the rise of the populist rhetoric.

Geopolitical risks have spiked and are set to only become more important and unpredictable in 2024, with the highest geopolitical risk in decades compounding economic uncertainty. This is due to election cycles, trade tensions and armed conflicts.

Elections

There is a busy election calendar in 2024, with 40 nations scheduled to go to the polls, including four of the five most populous countries, covering 40 per cent of the world’s population and GDP. Elections bring instability to both domestic developments at the policy level, as well as global consequences. Key dates to watch include:

• February sees presidential elections in Indonesia after a successful decade under Joko Widodo. It’s set to be a three-pronged race, with a potential run off in June and a new government in October.
• March 17 sees Russia go to the polls, with little surprise expected, while Ukraine’s planned March 31 presidential vote is likely to be postponed due to martial law.
• April/May sees India go to the polls, with Modi trying to secure a third term – he is ahead in the polls at this stage.
• June sees European parliament elections and a Mexican presidential vote, which could impact trade and border security with the US.
• In the US, government debt sustainability and fiscal path are set to be key in the November election. Despite this environment, large deficits limit the prospects of fiscal giveaways. A 6 per cent US deficit level would suggest that whoever ends up running for president in 2024 will not be doing so on the promise of major tax cuts. Foreign policy predictability, immigration, infrastructure, the economy and continued aid to Ukraine are also important election topics.
• Sometime in Q4 (unless snap elections are called) the UK goes to the polls. The opposition Labour party is well ahead in the opinion polls and appears set for victory. Higher taxes may be on the cards, with the high levels of public debt. There is a risk that consumers and businesses take a ‘wait and see’ approach to spending and investing ahead of the election.

Public sector fiscal deficits

Source: Bloomberg, Eurostat, ONS, US Treasury, JPAM. As at 15 Nov 2023

Trade restrictions

Rising geopolitical tensions could trigger further restrictions across the globe, with ‘re-shoring’ critical supply chains and economic security becoming even more front and centre of political powers. These include critical mineral inputs into the supply chains of the green energy transition.

Trade restrictions have tripled since 2017

Source: IMF, Goldman Sachs as at August 23

Conflict

The ongoing Israel-Hamas and Russia-Ukraine wars, and China-Taiwan conflict, could all impact markets in 2024. These continue to have potential impacts on agricultural and energy markets.

•  Ukraine is likely to step down as winter progresses and with lower funding from the West, but a negotiated settlement (the only way for a meaningful end to the conflict) seems highly unlikely.
• The Israel conflict is set to become a bigger issue if it is not contained to Hamas (Gaza) and Hezbollah on the southern Lebanese border. That is, if Iran has any direct role, it would impact oil prices much more, both directly and via trade through the Strait of Hormuz (20% of global supplies pass through).
• The China-Taiwan conflict continues to evolve and be front of mind early in the year. The Democratic Progressive Party (DPP) won a historic third successive term in January, but with a minority 40 per cent of parliament (from majority) meaning it will have to negotiate with opposition parties on all legislation and budgets. It remains to be seen if the new relationship between incoming President Lai and Beijing will involve a hardening or softening of approach from either party.

Populism

With elections comes the rise of the populist rhetoric. Populism poses a real threat to democracies for a number of economic, social and governance reasons. From an economic perspective, the key issue is that populism leads to the development and attempted implementation of poor economic policy. This policy gets them elected, but in turn, becomes very hard to implement due to social and economic consequences.

What does this mean for infrastructure?

We remain conscious of the volatile economic environment as well as the 2024 political overhangs, and we’re positioning accordingly. However, macro uncertainty and geopolitical tensions can also create unjustified market volatility and noise. We look to separate the resilience of the infrastructure asset class from this noise, and we remain optimistic about the long-term fundamentals underpinning the infrastructure investment case.

Moving into 2024, we will be monitoring the regional economics and politics closely, and positioning ourselves to best capture these at an in-country level.

Politics is an overhang and noise can be disruptive. We favour those regions that have less exposure to this dynamic, albeit will use any market volatility around the elections as a buying opportunity should it present itself.

2024 is set to be a pivotal year for the global economy, as we move past peak rates, growth moderates, and inflation continues its downward path to central bank target bands. There is still a potential window open for a recession considering the “long and variable lags” of monetary policy transmission.

For now, however, the market is pricing in a goldilocks scenario where inflation settles and growth doesn’t suffer a hard landing. This last mile of disinflation could be harder to achieve than the market is hoping for, meaning that rate cuts start in the second half of the year. Either way, lower rates are a tailwind for long duration infrastructure assets which we forecast to continue to have strong earnings growth driven by multi-decade thematics.

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