2025 infrastructure outlook: Bridging the valuation gap

The investment outlook for infrastructure in 2025 appears promising due to its potential for differentiated returns and inflation protection. Infrastructure assets offer a unique return profile, driven by growth in underlying asset bases, which are typically regulated to provide steady returns. This makes infrastructure attractive compared to more volatile asset classes like general equities and real estate, especially amid concentrated market conditions and inflationary pressures.

The inflation pass-through mechanism inherent in infrastructure assets is particularly valuable as it allows for price adjustments that protect equity returns over time. This feature is expected to gain importance with the potential for a second round of inflation driven by policy changes. Additionally, infrastructure has historically outperformed global equities in periods following peak interest rates, as seen after the last Federal Reserve rate hike.

The infrastructure sector is poised to benefit from secular trends such as decarbonization, increased power demand due to AI and data growth, and significant network investments. Utilities, in particular, are positioned for strong earnings growth given their stability and alignment with these long-term themes. Moreover, user-pays infrastructure assets like toll roads and airports are expected to thrive alongside projected GDP growth, though they may face challenges from potential reflation impacts.

Despite strong infrastructure earnings, there remains a gap between earnings and total returns due to valuation dislocations from rising bond yields. However, this gap is anticipated to narrow as market recognition of infrastructure's robust fundamentals and long-term growth potential improves. Overall, global infrastructure offers a compelling investment opportunity, supported by mega trends such as decarbonization, reindustrialization, and digitalization, which are expected to drive sustained growth.