Infrastructure for powering portfolios

Bottom line up top

A final flourish or a faltering fadeout? The S&P 500 Index is on track to return more than +25% for the second consecutive year, and four of the last six. But there is still more than a month to go in 2024 — an eternity for financial markets — which leaves plenty of time for U.S. equities to stumble before crossing the finish line. Investors would be well-advised to avoid complacency and stay mindful of risks that remain.

Inflation hasn’t waved the white flag yet. Perhaps chief among these risks is the seemingly irrepressible threat of inflation, defiantly insisting “I’m not dead yet!” like an extra in a Monty Python scene. Although the U.S. Federal Reserve’s historic tightening cycle slowed inflation, it remains well above the Fed’s stated 2% target due to components such as stubbornly sticky shelter costs. Those costs may not be coming down any time soon, based on diminished supply. Last week’s housing market data showed both housing starts and building permits for October falling short of consensus forecasts and nearing post-pandemic lows (Figure 1).

From bare cupboard to veritable cornucopia. Last week’s relative dearth of market-moving macro data gives way this week to a heavy helping of economic reports. Consumer confidence for November, the second estimate of third quarter U.S. GDP growth and core Personal Consumption Expenditures (PCE) Price Index (the Fed’s preferred measure of inflation) are among the deluge of data releases. More potentially portentous policy proposals from the incoming Trump administration could also influence investor sentiment and market performance during the holiday-shortened week. All told, this uncertain backdrop makes a case for allocating to asset classes that appear resilient enough to perform well under a variety of economic, market and policy scenarios.

Portfolio considerations

As the incoming Republican-led administration prepares to reshape policy and legislative priorities, a host of political advisers, strategists, think tanks and interest groups are jockeying to be influencers and insiders. At the same time, many investors are actively looking to position their portfolios based on which campaign promises they think are most likely to become law in 2025 and beyond. Some market-moving policy changes are surely in store, creating potential benefits — or headwinds — across various asset classes and sectors. But we also see several investable markets that have historically provided all-weather characteristics.

Publicly listed real assets is one such area. Companies in this part of the economy may be able to produce favorable investment results in virtually any market environment, thanks to the inherently essential functions, services or resources they provide. From real estate to commodities to infrastructure, these investments have tended to offer diversification, attractive income generation and a better hedge against inflation than other asset classes.

Listed infrastructure in particular remains one of our most favored areas, in the context of both (1) anticipated policy changes such as tax cuts, higher fiscal deficits and increased tariffs that could lead to stickier inflation; and (2) global mega themes associated with artificial intelligence (AI) and the corresponding growth in demand for power generation to support data centers. The proliferation of AI in the U.S. economy is expected to result in a nearly 40% increase in annual power demand between now and 2040.

This example shows how the structural trends of digitalization and electrification may make AI-related infrastructure development more insulated from shifting regulatory and policy backdrops in the nearterm. In the U.S., for instance, concerns that the incoming Republican Congress and administration will repeal parts or all of the Inflation Reduction Act (IRA) to fund proposed tax cuts may be somewhat overdone. While certain spending and incentives (e.g., electric vehicle tax credits) within the IRA may be cut or allowed to sunset, the legislation’s impact on government infrastructure spending has so far favored red (Republican) states over their blue (Democrat) counterparts (Figure 2). Additionally, an “America First” fiscal policy is likely to benefit U.S. infrastructure investment for years to come.