The Covid-19 pandemic has had different impacts across infrastructure sectors in emerging markets (EM). GDP exposed assets have experienced a sharp decline in valuations and GDP-correlated transport assets such as airports, ports and toll roads have come under pressure, whereas contracted freight assets used in global trade flows (e.g. containers, railcars and river barges) have proven relatively resilient. Social infrastructure, renewables and telecoms have seen less of an impact as they are less exposed to macroeconomic swings.
Focus on renewable energies, transport goods and digital infrastructure
Many emerging economies have been launching significant infrastructure programs, especially on the energy side, in the past years. We do not expect these investments to drop off to the same extent as seen in previous crisis periods. Hence, the energy sector, in particular renewable energy, will remain in focus for investors. A combination of spill-over and learning effects across EM, further reduction in capex and lifecycle costs for renewable energy installations as well as increasing importance of climate action on EM governments’ agendas will likely contribute to more international private capital flows into EM renewable investments. This is expected to lead to increasing competition in certain emerging countries which in turn will put pressure on returns. On the transport side, it is expected that valuation of less GDP related assets will remain relatively high in 2021 as investors recognize their attractiveness and stability across cycles. Furthermore, the Covid-19 pandemic evidenced how digital connectivity is critical to societal resilience and business continuity in times of crisis. Already in 2020 we have seen a pick-up in communication infrastructure related deal flow on EM) and we expect this to accelerate in 2021.
We expect Asia to account for the majority of infrastructure spending going forward. Rising incomes and a continuing trend of urbanisation will result in in evolving infrastructure needs such as smart cities, telco infrastructure, and urban mobility. Driven by demographics and increasing industrial activity and the continuing reduction of cost for renewables power demand is expected to continue to grow at very fast pace. Returns are likely to come down as international investors increasingly invest in the region, especially in Southeast Asia.
Reasons for infrastructure investments in emerging markets
Emerging markets present many attractive sustainable infrastructure investment opportunities, allowing investors to achieve robust risk-adjusted returns. Investors have the chance to not just address the need for essential infrastructure in emerging markets but to also contribute to a low-carbon and climate-resilient future, economic growth, and job creation. Going into 2021 we are seeing an acceleration in deal activity in resilient infrastructure sectors such as renewable energy generation as well as data infrastructure, driven by improving sector fundamentals as well as increasing investor demand for stable, contracted assets with a positive contribution towards the UN Sustainable Development Goals.
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About BlueOrchard Finance Ltd
BlueOrchard is a leading global impact investment manager and member of the Schroders Group. As a pioneering impact investor, the firm is dedicated to generating lasting positive impact for communities and the environment, while providing attractive returns to investors. BlueOrchard was founded in 2001, by initiative of the UN, as the first commercial manager of microfinance debt investments worldwide. Today, the firm offers impact investment solutions across asset classes, connecting millions of entrepreneurs in emerging and frontier markets with investors with the aim to make impact investment solutions accessible to all and to advance the conscious use of capital. Being a professional investment manager and expert in innovative blended finance mandates, BlueOrchard has a sophisticated international investor base and is a trusted partner of leading global development finance institutions.
To date, BlueOrchard has invested more than USD 8bn across more than 90 countries. Over 215mn poor and vulnerable people in emerging and frontier markets received access to financial and related services with the support of BlueOrchard as of December 2020. For additional information, please visit: www.blueorchard.com.
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