Infrastructure Outlook 2014: Global Macro Trends Favour Developed Markets


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Infrastructure Outlook 2014: Global Macro Trends Favour Developed Markets
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With an ameliorating economic environment in developed markets and a deceleration in emerging markets, we believe 2014 will mark the year when infrastructure investments in developed markets regain their lustre for investors. This will be the case in North America, Western Europe and Asia.

Conversely, risk premiums will rise for emerging market projects translating into higher cost of financing, and therefore those with the most sophisticated regulatory frameworks will outperform. Certain markets in Latin America are cases in point, evident by the ambition of their infrastructure plans; while in Sub-Saharan Africa the pertinent risks lead us to anticipate even higher foreign state-backed credit funnelled in infrastructure.

In line with BMI's view that global economic growth in 2014 will be led by an impressive acceleration in developed markets as opposed to emerging markets, we see a continuation of investor preference for developed market infrastructure investments. Private capital for infrastructure has become an important source of funding for projects, fuelled by institutional investors turning to the sector. With record fundraising of US$32.6bn over 2013 in unlisted infrastructure funds there is evident market appetite for new investments, and much of this has been focused on North America and Western Europe.

Indeed, although strong growth expectations have attracted capital to emerging markets infrastructure, the level of risk (whether regulatory, business environment or political) has kept several of the more conservative investors (like some of the larger, cash-rich, pension funds) at bay. At the same time, the uncertainty and persistent recession in developed markets is easing, lowering concerns over demand risk (for transport assets) and price risks (for utilities and renewables).

In light of these trends, 2014 will see developed markets continue to re-gain some of their lost lustre in the eyes of institutional investors. Canada, the UK, Japan, the Nordics, New Zealand and Australia will all become major areas of focus and capital attraction as economic recovery gathers pace. Asia is a pertinent example , where we see the developed markets in the region, such as Hong Kong, Singapore, South Korea and Taiwan becoming increasingly relevant to the region's growth performance in infrastructure.

The "taper talk" in 2013 that sparked the selloff in emerging markets has also meant much costlier borrowing for many emerging market governments. We believe that public-private partnerships will continue to be pursued by emerging markets in 2014, as an means of developing much needed infrastructure investments and boosting competitiveness without stretching government finances.