Falling Inflation Won’t Knock Down Infrastructure

Over the long term, the asset class has generated an average annual return of 9.9 percent when the CPI has been higher than average but falling.

Illustration by II

Illustration by II

With inflation falling but staying above trend, listed infrastructure could be poised to deliver attractive returns.

Over the last 50 years, according to the latest report from Cohen & Steers, the asset class has generated an average one-year real return of 9.9 percent when the consumer price index has been higher than average but falling, a situation similar to today’s macro environment. That’s 2.3 percentage points above its long-term average return of 7.6 percent.

Ben Morton, head of global infrastructure at Cohen & Steers, explained that the economy has recently moved into a new phase. “We just went through a period of below-trend but rising inflation. That’s the best period for infrastructure performance relative to its long-term average.”

According to the report, from January 1973 to March 2023, listed infrastructure returned an average of 16.8 percent during periods of below-trend but rising inflation. But Morton said that because the inflation outlook has been upended by consecutive rate hikes in the past year, it’s time to “take a more nuanced look” at their bullish view on the asset class.

After analyzing the sector, Morton concluded that listed infrastructure would continue to generate strong returns in the current macroeconomic environment. First, he said, the asset class is expected to benefit from a fairly persistent and longer-lasting period of above-trend inflation. “Infrastructure assets tend to have pricing mechanisms that are linked to inflation,” he explained. “Toll roads that have long-term concessions at a rate linked to inflation is an easy example.”


Second, even if a recession hits the economy in 2023, the demand for infrastructure is unlikely to subside. “On average, the asset class is much less sensitive to economic conditions than the average stock or business within the broader equity market,” Morton said.

According to the report, listed infrastructure has outperformed the market in three of four business cycles over the last half century, including the early, late, and recessionary stages. During the late cycle — a period in which the Composite Index of Coincident Indicators, an index developed by the Conference Board, is decreasing — listed infrastructure generated an average annual return of 14.2 percent, beating the market by 6.2 percentage points. Listed infrastructure also offered better protection than the market during recessionary periods, with an average annual loss of 7.3 percent, compared to a loss of 10.7 percent by global equities.

Morton added that some infrastructure subsectors, such as energy, utilities, and freight railways, are especially attractive in the current environment. “Energy transition is really driving a lot of interesting opportunities for utilities, [whether] it’s solar, wind, or the transmission lines needed to connect these new sources of generation to consumers,” he said.

He added that freight railways, which many investors avoid during recessions, could be a good opportunity as the U.S. railway system becomes more efficient and less vulnerable to fluctuations in freight volume.