Markets around the world continue to trade with a lot of uncertainty. Rising interest rates, inflation, and geopolitical issues are rampant across the globe. And of course, this has affected markets along the way.

Yet within this fluctuating market, an incredible growth opportunity is still possible with a defensive investment strategy. That’s exactly what you can find with infrastructure today, says David Wahl, director and portfolio specialist for ClearBridge Investments, a Franklin Templeton company.

In a Spotlight interview with NEO Exchange on October 13, 2022, Wahl shared some insight on the appeal of infrastructure investing, particularly during times of market volatility.

Short-term benefits

Wahl describes in the interview how every step throughout a typical morning in his life is supported by infrastructure. Whether it be taking a shower, making coffee or riding the train to work, infrastructure provided the means to that end.

That’s because infrastructure makes up the serviceable assets that provide us with the countless services that are essential to living our lives And that’s what makes them such a promising investment opportunity.

“No matter if markets are in a boom or in a bust, we generally interact with these services every single day, as the demand for those services really remains fairly constant,” Wahl said.

As inflation, rising interest rates, and the ongoing economic environment weigh on investors, it’s an ideal time to get into infrastructure, as 90% of the assets in which they invest have some kind of inflation hedge.

“We get 80% of the upside, but only capture about 40% of the downside,” he explained in the interview with NEO’s Chief Revenue Officer, Erik Sloane. “It’s not just a product, but really a solution for this uncertain time we’re in.”

Long-term excitement

While exposure to infrastructure could make a lot of sense in this current environment of market uncertainty, it’s also a strong long-term investment proposition, Wahl said. There is significant growth in infrastructure assets around the world. Because of this, many investors believe that infrastructure is an emerging market story.

“That’s true,” Wahl said, “but it’s also a developed market issue about maintenance, improvement, capacity upgrades, all of those things.”

A major driver for growth, however, is the adoption of “net zero by 2050” targets around the world. To achieve those targets, the private sector is going to have to contribute, Wahl explained. This is the growth side we’re seeing right now.

But on the flip side, infrastructure continues to provide stable income and growth. This growth is supported by long-term contracts, as well as revenues that remain linked to inflation. So, investors can achieve growth, while also experiencing diversification. 

“It’s a chance to de-risk part of your equity portfolio for the long term,” Wahl added.

Why actively managed funds work

In the case of the Franklin ClearBridge Sustainable Global Infrastructure Income Active ETF (FCII) Wahl believes an actively managed strategy continues to be the best option for infrastructure. The fund targets G7 inflation of over 5.5% over five years. This ensures the portfolio remains on consistent absolute returns, and allows the fund to shift away from gas when it’s not prudent, for example, to avoid drops in the market. 

FCII is actively managed by the largest global infrastructure team out there, according to Wahl, with managers looking at investments from a valuation perspective. Current market conditions have made it a great time to look for opportunities, as the markets move into the end of the business cycle, and potentially into a recession.

What kind of opportunities exist with infrastructure?

Whether you’re looking long or short-term, there are a number of opportunities that Wahl believes investors should consider.

In the coming years, infrastructure is expected to be a massive growth story. Global utilities, pandemic and economic recovery, the 5G revolution, and decarbonization will all play a significant role - not just in the next decade, but even beyond.

“For every two electric vehicles you add, it’s like adding one house to a service territory,” Wahl said. “By 2050, the U.S. will be generating at least double the electricity it is today.” 

To get there, the U.S. alone will need more power sources, and to expand their ability to transmit that power to locations across the country.

“The transmission infrastructure we have today took 100 years to build,” Wahl said. The power the U.S. will demand will “have to be [up and running] by 2030 to reach 2050 power needs.” 

Adding infrastructure to your portfolio

For investors, or advisors looking to fit infrastructure funds into their clients’ portfolios, Wahl recommends taking equities and de-risking them by putting them in less volatile infrastructure spaces. This is something most investors need, yet it can be difficult for them to navigate alone. 

Long-term, there looks to be solid potential with clear growth opportunities. That’s thanks to investment alongside public policy for energy security, fiscal policy moving towards emissions reductions, and infrastructure spending.

“President Biden says he wants to reduce emissions by half by 2030. Half of the power coming from solar plants by 2050. If we add it up, it’s going to take 40% to 100% more electricity to accomplish that, and that’s going to take a lot of renewables in the decarbonization space,” Wahl explained.

To reach the $350 billion needed to invest in electricity infrastructure and achieve net zero, government and private support will be critical. That level of investment required by these sources points to great investment potential for investors.

“There’s a dire need for infrastructure spending,” Wahl said. “And that’s going to move growth.”