Infrastructure investment set to rise

Spending on infrastructure and capital projects is expected to be worth over US$9 trillion per year by 2025, according to PWC, more than double the US$4 trillion spend estimated for 2012. Growth in the global population, increasing urbanisation, and upgrades to outdated assets continue to drive spending across many sectors, including social (for example schools and healthcare), utilities (including water and sanitation), and transport.

These projects are typically funded by public spending, but many governments are heavily indebted. They are looking for other sources of funding, and they are eager to encourage private investment. Direct investment in specific infrastructure projects is usually limited to larger investors, but smaller investors can also gain access via listed entities such as infrastructure companies or investment trusts.

Investing in infrastructure comes with many attractive features. They typically offer a reliable stream of cash flows with the potential for growth linked with inflation. They also typically offer returns backed by a government sponsor, providing security of returns. In combination, these features mean that infrastructure can be a good source of returns that are lowly correlated with other mainstream investments. We believe infrastructure can play an effective role in a multi-asset portfolio, helping to diversify potential returns and offering a source of steady long-term performance.

Steve Waddington – Insight, a BNY Mellon company

Spending on infrastructure and capital projects is expected to be worth over US$9 trillion per year by 2025, according to PWC, more than double the US$4 trillion spend estimated for 2012. Growth in the global population, increasing urbanisation, and upgrades to outdated assets continue to drive spending across many sectors, including social (for example schools and healthcare), utilities (including water … read more

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Winds of change: a big leap forward for renewables

Between 2004 and 2014, renewable energy’s share in Europe doubled from about 8% to 16%, and it is still growing. We are nearing a tipping point, and in certain niches, we believe wind power has significant potential to disrupt the traditional energy market.

As a percentage of all incremental future electric capacity, wind power is taking a big leap forward from a small base.  At the same time, its cost base has fallen, making wind power increasingly competitive with coal and gas in many markets, even on an unsubsidised basis.  (In fact, it is directly competitive at generation, but loses some efficacy once the costs of backup and grid connections are factored in.)

Setting aside the recent drop in commodity prices, the costs of wind power are declining more rapidly and more sustainably than conventional power. In addition, clean air standards are driving widespread adoption, regardless of whether wind power costs a penny or two more.

Mark Bogar and Andrew Leger – The Boston Company Asset Management, a BNY Mellon company

Between 2004 and 2014, renewable energy’s share in Europe doubled from about 8% to 16%, and it is still growing. We are nearing a tipping point, and in certain niches, we believe wind power has significant potential to disrupt the traditional energy market. As a percentage of all incremental future electric capacity, wind power is taking a big leap forward … read more

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The yield pursuit

In a world of low or negative yields from government bonds, we believe investors could consider adding global corporate bond exposure. While investors need income, they’re certainly not getting it from government debt where yields are generally low or negative at the moment.

In contrast, the current spread of corporate debt over government credit is around 1.5% at present. This range is perhaps not as attractive as in 2008 and 2012 but it does still make sense in our view. Spreads in the immediate aftermath of the global financial and European sovereign crises reflected systemic risks. Current spreads may not be as attractive as back then but they are at levels typically associated with recessions and yet we do not see a recession on the horizon.

Meanwhile, investment grade debt has the advantage of offering a comparatively attractive return but without the risk of default and low liquidity associated with high yield debt.

Adam Whiteley – Insight, a BNY Mellon company

In a world of low or negative yields from government bonds, we believe investors could consider adding global corporate bond exposure. While investors need income, they’re certainly not getting it from government debt where yields are generally low or negative at the moment. In contrast, the current spread of corporate debt over government credit is around 1.5% at present. This … read more

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Is now the right time to seek value in EM debt?

While emerging market debt remains deeply unfashionable, we believe it may have now reached an inflexion point. A lot of people have lost money in emerging market currencies but the flipside of that is that the sell-off has created value. Yields are back to where they were in 2005 or 2009. For the first time in a long time we see the potential for being paid to take on risk.

Yields on hard currency government debt in some EM countries illustrate the point, even at the investment grade level. El Salvadorian government credit, for example, has yields at more than 8%; on Saudi Arabian quasi-sovereign debt they come in above 6%. For Ivory Coast they are above 7% while for Kazakhstan they are 6%.[1] There are good countries and there are bad countries. We believe the real cornerstone of emerging market investing is to question: am I sufficiently compensated for the risk I’m taking on?

Brazil and Russia are two countries where we believe current valuations could justify careful investing. If you consider Brazil, the selloff in 2015 was similar in scale to that of Russia in 2014. Both countries have huge problems. They’ve had credit downgrades, they’ve had a terms-of-trade shock from falling oil prices and they’ve experienced political or geopolitical upheavals. Our job as investors is to sift through the wreckage of the sell off and to ask ourselves whether we’re being paid enough to shoulder those risks. Now is the time to explore.

Colm McDonagh – Insight, a BNY Mellon company

[1] Source: Bloomberg as of 7 January 2016

While emerging market debt remains deeply unfashionable, we believe it may have now reached an inflexion point. A lot of people have lost money in emerging market currencies but the flipside of that is that the sell-off has created value. Yields are back to where they were in 2005 or 2009. For the first time in a long time we … read more

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