With interest rate hikes underway, investors have begun to consider the impact of rising rates on investment assets, including infrastructure. A common misconception is that infrastructure equity is better positioned than debt in an environment of rising rates, but our research shows this is not necessarily the case.
The interest rate hiking cycle is underway in most global economies. In the US and Australia, the market is expecting central banks to raise the cash rate to 3.25% and 3.65% respectively, over the next year. The mix of elevated inflation and rapidly tightening labour markets is generating urgency for central banks to normalise cash rates back to more neutral levels. Given the strong momentum in the market, now is an opportune time to investigate the impact of rising rates on infrastructure projects.
As this paper outlines, we believe that debt is better placed than equity to navigate a rising rate environment, particularly if the rise in rates isn’t accompanied by increased economic growth. We also believe that the opportunities for infrastructure equity are becoming increasingly scarce, while there is still significant opportunity for the private debt market to grow.
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