Despite market turbulence in 2022, infrastructure debt performance has remained resilient. We expect the asset class to continue its stable performance in 2023, demonstrating diversification benefits, protecting against inflation and rising interest rates and providing steady cash yields while helping to finance secular trends toward sustainability and energy transition.

Energy security and sustainability

Global energy scarcity, catalyzed by the Russia/Ukraine conflict, has contributed to both inflation and economic stress across the UK and Europe, while also emphasizing the need for diversified power generation sources as a matter of geopolitical security. We expect to see additional investment directed toward European renewables and the development of liquefied natural gas (LNG) midstream assets.

Globally, we have developed high conviction in assets that will help companies and governments meet net-zero emissions commitments. Utility scale renewables, renewable distributed power generation and energy transition assets (such as battery storage) remain in high demand. To achieve net-zero commitments, global economies will need to increase wind capacity by 8x, solar capacity by 9x and battery storage by 175x by 2030, implying a USD 750bn+ increase in annual investment and a deep market for debt financing.¹

Digitization

We expect investments into digital infrastructure to continue sustained growth in 2023, driven by long-term demographic shifts. The global population in 2050 is expected to be ~10 billion, versus ~7 billion today. Additionally, by 2050 approximately 70% of the global population is expected to live in urban areas (versus ~50% currently), increasing demand for digital infrastructure such as fiber optic networks, outsourced telecommunications equipment and data center capacity. We remain selective in this space, with a preference for assets that benefit from favorable supply/demand dynamics, investment-grade customers and limited overbuild risk. 

Regulatory shifts

We have witnessed a recent increase in regulatory activity and sovereign intervention, which is likely to continue into 2023. While some recent sovereign intervention has proven remarkably positive for our 2023 outlook – such as the Inflation Reduction Act in the U.S., which creates significant incentives for new renewable energy capacity – political intervention can potentially shift long-term projections and can introduce risk due to uncertainty of regulatory outcomes. We have recently witnessed government responses to high energy prices, primarily in the eurozone and UK, such as price caps on imported gas, revenue ceilings on power generation companies and windfall taxes. We continue to focus on underwriting loans where borrowers have strong contractual legal protections, provisions that compensate borrowers in the event of a change-in-law event and jurisdictions with stable judicial systems.

Inflation

We expect inflation to moderate in 2023. One of the key features of infrastructure debt is that borrowers generate revenues that are linked to inflation and typically have the ability to pass through cost increases to end customers. As such, we expect infrastructure debt assets to continue performing well in an inflationary environment.

Rising interest rates

As central banks have grappled with inflation, benchmark rates across the U.S., UK and eurozone have increased to recent highs, with policy signaling rates will continue to increase through late 2023.

As illustrated below, in the last 12 months through November 2022, public liquid infrastructure debt yields have gone from 296 bps to 629 bps for USD assets and from 57 bps to 443 bps for EUR assets.  

Infrastructure debt: Annual yield to maturity vs. option-adjusted spread (OAS)

Source: IHS Markit iBoxx Infra Debt Index (EUR, GBP and USD), J.P. Morgan Asset Management; data as of 11/8/21 and 11/8/22.

As public market spreads typically widen before private debt markets, we expect yield tailwinds driven by base rate increases to continue through 2023. In addition to favorable base rate movements, we anticipate credit spreads will widen as banks retrench due to regulatory capital constraints, creating opportunities for private institutional capital. 

Asset class resilience

The threat of an economic slowdown and a recession remains prevalent for 2023. We expect the demonstrated resilience of the infrastructure debt asset class to continue into 2023, providing a haven for investors seeking relative safety as an economic pullback looms. As illustrated in the following chart, infrastructure debt assets performed relatively well during the COVID-19 pandemic, in line with their performance during previous economic downturns. Infrastructure debt assets witnessed ~8% total return declines during the outset of the pandemic versus ~20% declines for U.S. equities. Similarly, infrastructure debt assets declined ~2% versus ~40% for U.S. equities during the global financial crisis in 2008-2009. Lastly, per Moody’s Investors Service, infrastructure debt demonstrates default rates similar to A-rated corporate debt after year 7 with fewer defaults and, in the event of default, higher recovery rates than corporate bonds.²

Total return of infrastructure debt vs. equities and corporate fixed income

Source: Bloomberg, J.P. Morgan Asset Management; data as of 12/20/22. 

¹ BloombergNEF. New Energy Outlook 2021. References increases versus 2020 power generation and annual investment levels.
² Moody’s research report: Default and Recovery Rates for Project Finance Bank Loans, 1983–2020; published March 2022.

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