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The investment case for infrastructure has never been stronger, with significant investment in power grids required due to the boom in artificial intelligence ("AI"), the green energy transition and onshoring of manufacturing in many nations, according to Dr Kevin Hebner, global investment strategist with Epoch Investment Partners, Inc. ("TD Epoch").
Dr Hebner says energy infrastructure companies are likely to outperform in the medium term, after a strong performance in 2024, with US-listed utilities the second-best performing S&P 500 sector year-to-date as of 5 Aug 2024.
“We view the asset class as attractive because it has a relatively low correlation to equities, provides a hedge against inflation, and offers long-term, stable, risk-adjusted returns,” he said.
“In addition, significant investment in power grids is occurring, resulting from the AI boom, the green transition and onshoring, as well as previous underinvestment. The US and many other countries have an enormous need for new infrastructure. Overall, we believe the investment case for infrastructure has never been stronger,” Dr Hebner said.
TD Epoch has developed an Electricity Infrastructure index which is a market-capitalisation weighted index of eight companies: Eaton, Trane Technologies, Quanta Services, Vertiv, nVent, Equinix, Digital Realty Trust, and Amphenol.
“Our index is comprised of companies exposed to electricity infrastructure and has dramatically outperformed the S&P 500 since ChatGPT was released in November 2022. Continued developments in AI could drive electricity demand even higher, resulting in further outperformance for this index,” said Dr Hebner.
The figure below shows the outperformance of Epoch’s index since 2021.
According to Dr Hebner, AI models possess a seemingly insatiable thirst for electricity, which will help to underpin strong performance by electricity infrastructure assets.
“The amount of compute requirements has been increasing exponentially in recent years, with no signs of slowing down. For example, generating images requires more than 1,000 times the energy of texts. The energy demands of sound and video generation will be thousands of times greater still."
“Data centres are power-hungry beasts, and we expect their overall electricity demand to triple over the next decade. The global data centre market size is set to increase from US$230 billion in 2023 to US$640 billion by 2032, representing a compound annual growth rate (CAGR) of 12.1 per cent,” he said.
Between 2020 and 2022, annual electricity demand from Microsoft, Google, Amazon, and Meta grew 58 per cent to an astonishing 90 terawatt-hours. Most of this surge in energy demand was driven by data centre builds, with Microsoft alone currently adding a new data centre roughly every three days.
According to Dr Hebner, the electricity demand boom will stress existing infrastructure, including generation capacity, transformers, and the transmission and distribution grid. Without massive investment, there is a rising risk that electricity demand races ahead of supply. “This could create a chokepoint that impedes AI progress, with negative consequences for innovation, productivity, national security, and equity markets,” he said.
Across the globe, the International Energy Agency (IEA) expects AI and data centres to represent about half the increase in demand for electricity over the next decade, with the transition to electric vehicles (EVs) and the reshoring of manufacturing facilities accounting for roughly 30 per cent and 20 per cent, respectively.
“The objective of onshoring is to reduce supply chain vulnerabilities, an especially critical ambition for semiconductors. Onshoring is an ongoing secular trend and is an additional factor driving electricity demand growth,” Dr Hebner said.
Demonstrating the importance of having alternatives in a portfolio, the infrastructure sector has experienced exceptional growth in assets under management (AUM) since the global financial crisis (GFC). The COVID-19 pandemic too has reinforced that many alternative assets, including energy infrastructure assets, remained resilient amid the market turmoil, according to Dr Hebner.
