Low Bond Yield Outlook Prompts Bullish Infrastructure Finance View
BMI View: Reinforcing our bullish view of the role that cash-rich pension funds will play in the infrastructure finance sphere, a European heavy-weight, PensionDanmark, has announced a long term commitment to the sector. Regulated utilities in the European and North American markets will be the sectors and regions of choice, though the fund said that it is planning a venture outside of Europe and the United States at a later stage . Low bond yields are the main reason for this portfolio diversification, and we see PensionDanmark's decision to explore infrastructure as reflective of a wider industry trend.
BMI expect s interest rates to remain anchored near zero for the foreseeable future, thus (in tandem) keep ing bond yields in negative territory in real terms . Based therefore on BMI's long term forecast for policy rates in Europe and North America, we expect that an increasing number of pension funds will actively pursue higher-yield, alternative asset class investments. The long dated maturity and inflation-linked, stable returns from infrastructure assets (especially regulated utilities in OECD markets) , match the mandate and risk profiles of the pension funds industry.
Over the medium term therefore, we would also expect to see the rising number of pension funds that are getting into the market translate into higher fundraising, which has been in a tentative recovery phase since 2009. However, there is a caveat to this expectation stemming from the much more active role taken by pension funds as managers and owners of assets, thus by-passing the infrastructure funds sector altogether. Therefore, a moderating of growth in fundraising could also be reflective of a more structural change in the infrastructure funds community, with some of their largest clients i.e. the pension funds, taking a more independent approach.
|Not A Good Outlook For Yields|
|Central Bank policy rate, % end of period|