Equity markets began the month of March on a weak footing as concerns over a potential economic slowdown in the United States intensified. Investor sentiment deteriorated further following an interview with President Donald Trump, in which he downplayed the recent market correction and refrained from ruling out a recession. Instead, he characterised the economy as undergoing a "transition period" that would require time before his policies yield tangible benefits.
This shift in rhetoric signals a greater tolerance from the administration for near-term market volatility in pursuit of broader economic objectives. As a result, expectations surrounding a policy-driven market backstop -- the so-called "Trump put" -- have been recalibrated to a lower threshold than initially anticipated.
Back in January, this column opined that 2025 is year of capital preservation after two years of back-to-back double-digit gains in the S&P 500. While we are open to the idea that equity markets may be in the midst of a consolidation driven by the trade war news flow, we cannot help but wonder if tariffs are not just a convenient excuse to justify a drawdown triggered by something more endogenous.
Bonds have outperformed equities in the US for the year to date. Surprising as this may be, there might be a perfectly valid reason for this trend in relative performance. US economic data has surprised to the downside recently, explaining why the 10-year US Treasury yields have fallen from a peak of close to 4.80% to just under 4.3% in less than three months.
Meanwhile, federal fund futures are again discounting three interest rate cuts this year, from just one earlier this year. There is also market chatter that President Trump's favourite performance indicator may no longer be the S&P 500 Index, at least in the short term.
The metric that has been emphasised recently by the Trump administration officials is the level of the 10-year US Treasury yield. The rationale is the benefit of lower interest rates, which improves housing affordability and benefits a broad segment of the US population. Thus far, this presidential mandate seems to be about Main Street, not Wall Street.
Against such a backdrop, alternative assets with low to moderate correlation to stocks and bonds can add value to diversified portfolios. Private infrastructure is one such asset class, which is not subject to daily news and market flows.
Amid today's uncertain markets and inflationary landscape, private infrastructure emerges as a powerful capital markets sector, offering a unique blend of resilience and long-term growth.
MODERN-DAY ESSENTIALS
Private infrastructure for modern living, such as high-speed fibre networks, cellular towers and data centres, are particularly attractive investment opportunities. These investments are not only potentially lucrative but also transformative and economically critical, making them essential for the continued growth and development of a fast-emerging digital economy. Beyond the massive opportunity, private infrastructure investing also offers several distinct advantages for investors.
Private infrastructure assets have historically delivered competitive returns, while demonstrating limited volatility compared with the more traditional asset classes. This has translated into historically strong risk-adjusted returns. Furthermore, the long-term nature of the assets means that private infrastructure has shown resilience by maintaining steady returns even during significant market downturns.
In addition, the essential nature of the services provided adds a defensive, more durable layer for investors. The resilient and stable cash flows backed by the long-term contractual or regulated income streams of the assets may provide an extra level of stability in difficult market environments.
Infrastructure assets are hard assets and therefore can offer a degree of inflation protection. Cash flows are often indexed to inflation, which means that costs can be more easily passed on and margins preserved in an inflationary environment.
The increasing demand for data and connectivity is driving secular growth in digital infrastructure, including data centres and fibre networks (digitisation). Furthermore, the transition to renewable energy and sustainable infrastructure presents significant investment opportunities in areas like green energy and energy storage (decarbonisation). Finally, around half of private infrastructure opportunities come from corporations selling their infrastructure assets to free up capital (deconsolidation).
LIQUIDITY RISK
While private infrastructure offers compelling benefits, there are potential risks too. The long-term nature of private infrastructure assets means they require long-term capital commitments, which limits liquidity.
In so-called "evergreen" strategies, this risk is mitigated somewhat by offering periodic subscriptions and redemptions, subject to restrictions, which give investors greater flexibility to enter and exit at different times. In terms of the underlying assets, there may be potential operational challenges as well as regulatory risks due to policy changes, regulatory reforms, and political interventions.
In private markets, top-performing managers have the potential to significantly outperform their peers. Thus, the right expertise combined with the right strategic approach in private infrastructure investing are paramount to generate competitive returns, withstand uncertainty, and capitalise on opportunities in a fast-evolving world.
Kean Tan is Managing Director, Senior Adviser and Head of Investment Solutions at SCB-Julius Baer Securities Co Ltd in Bangkok