Brazil, Mexico and Chile are the most attractive countries for infrastructure investments

Protecting capital against the backdrop of high inflation, high interest rates and an economic downturn is by far one of the main concerns when it comes to investing.

In this context, real assets, especially those associated with essential services, are an increasingly attractive option to secure money and make it profitable.

Against this background, sectors such as renewable energy, transport infrastructure and the development of the 5G network appear attractive for 2023, although for Latin America the sectors related to electricity generation and distribution will be the most attractive.

This is the picture that Franklin Templeton fund manager ClearBridge Investments paints for the performance of this asset class in a year marked by risks stemming from recession fears, political tensions and high inflation, but which also presented a range of opportunities for infrastructure and Utilities that valuations are currently very attractive, the company said.

THE ATTRACTIVENESS OF LATIN AMERICA

In an interview, Dave Wahl, Senior Portfolio Specialist Director at ClearBrigde Investments, was positive about these assets in the region’s economies, highlighting the regulatory structure and quality of contractual relationships, which he believes would contribute to structural growth opportunities in emerging markets.

On the other side of the coin, however, the biggest challenge will be high inflation, higher interest rates and the strong US dollar.

All infrastructures related to public services are attractive there, Wahl said, citing Brazil as the most important market, both in terms of size and revenue.

In his analysis of that economy, while noting the shift to the left that occurred with Lula da Siva’s election victory, “we believe that the regulatory framework for regulated assets such as water, power and gas transmission and distribution remains in place and that the prospect of government intervention will be slim”.

Mexico is another market that’s attractive to the company and one it’s betting on given the size of the economy and proximity to the United States.

Chile is also on the list of well-weighted markets, albeit to a lesser extent than the other two.

WHY INFRASTRUCTURE?

The reason for investing in infrastructure during tough economic times is simple.

At least that is the view of Daniel Chu, director and portfolio manager at ClearBridge Investments, who argues that the rationale for these bets is that these types of real assets provide an essential service to society and generate regulated or contracted returns that are transparent and consistent, and that they also have various mechanisms in place to absorb the higher costs of inflation and higher interest rates.

“The impact on infrastructure assets is likely to moderate, particularly for regulated assets where companies generate their cash flow, earnings and dividends from their underlying assets. We expect these assets to grow in the coming years,” Chu said.

In addition, most infrastructure companies are tied to inflation in their earnings or returns. “As real yields fall, utilities should do well, and we’ve currently positioned our infrastructure portfolios to reflect that,” he said.