Infrastructure – rising rates and the "natural hedge"
Inflation has accelerated globally as a result of consumer demand, fuelled by fiscal policy, pushing into supply constraints due to COVID-19 and geopolitical upheaval. US inflation is running at 40-year highs and other advanced economies are at or near similar extremes.
Higher interest rates have traditionally been viewed as a negative for the performance of long-duration investments, like infrastructure, as they put downward pressure on asset valuations. This occurs not only because of the potential increase in the cost of borrowed capital, but also because the discount rate that is used to value infrastructure asset cash flows is likely to increase in response to changes in the relevant long term sovereign bond rate (known as “the risk-free rate”).
While this is true, one could believe the positive linkages that some infrastructure assets have to inflation and economic growth can provide a natural hedge that may be sufficient to offset these negative valuation impacts.
About the author
Executive Director, Portfolio Management
Joined in 2007
Michael heads up the Portfolio Management Team, providing fund analysis and thought leadership across IFM Investors’ Australian and Global Infrastructure portfolios. Michael is also responsible for fund transactions and asset management, and is a board member of NT Airports. Prior to joining IFM Investors, Michael worked for BHP Billiton, where he was involved with industrial research and development, oil and gas exploration, field development, engineering and planning, strategy development, and mergers and acquisitions.