‘Bricks and mortar’ are the best infrastructure bets in Asia
12 Oct 2012
Roads, power generating facilities, hospitals and logistics networks are the "hard" infrastructure assets that J.P. Morgan's Global Real Assets Group thinks investors should be focusing on in Asia.
The options for infrastructure investment in Asia span a wide range from electricity cables, wind power, telecommunications towers, to sewerage treatment plants, waste to energy, bridges and railways. J.P. Morgan Asset's current preference in Asian infrastructure is for "bricks and mortar", according to Vijay Pattabhiraman, CIO of Global Real Assets - Asian Infrastructure Group. "Infrastructure is relatively immune to global forces as it is very local."
J.P. Morgan's Asian infrastructure fund is invested in precisely those bricks and mortar type assets. The fund has a diversified portfolio of infrastructure in terms of country exposure and asset type.
In Asia, the Singapore-based Pattabhiraman says they like the look of power, both conventional as well as renewable sources such as wind, mini-hydro and waste to energy; water supply and waste water treatment; plus roads and logistics companies, or using the infrastructure jargon, "physical connectivity" assets. "Performance of a portfolio of water treatment plants in London does not affect water treatment in China. Unlike, say the computer business, the rate of change in infrastructure, such as technology obsolescence, is slower. A road now is similar to a road fifty years ago, and pipes are still typically the method of choice to transport water."
How about returns on these kinds of infrastructure assets on a portfolio basis? He explains that in Asia, an investor taking a position in constructing and operating these types of assets can generally expect a higher return than in Europe and North America, partially due to the fact Asia's infrastructure story is about the expansion of assets, hence returns reflect the added growth potential.
"Globally, one hears a lot of investors say that they want an 8% return. That seems to be a frequently mentioned number," Pattabhiraman says. "To get that in fixed income and equity you need to take volatility. Infrastructure may even be more risk-free an investment than some government bonds. In the developed world, infrastructure is typically a fixed income, inflation-linked style investment that is closely regulated. Maybe a 6-10% return. It can be regarded as a kind of inflation hedge. In Asia, infrastructure is about growth and new build. Capital gains are a significant portion of returns, which can be in excess of 15% - 18%."
Author: Simon Osborne