By TIME Investments

Market landscape

Inflation has been one of the key macroeconomic drivers of investment performance over the last 18 months and this will likely persist into 2024, albeit to a lesser extent. We have however started to see a shift, with annual inflation in the UK and other Western major economies now well below its peak. The debate, therefore, has largely moved to when UK CPI will meet the Bank of England’s (BoE) 2% target. The BoE itself forecasts this to occur in calendar Q2 2025 but the performance of the UK economy could influence this timing heavily according to market forecasters. Capital Economics estimates that UK CPI could be below 2% before the end of 2024 with a large element of this a weakening of economic growth, and potentially a recession early this year.

Inflation will be a key factor in any BoE decision making when it comes to the pathway of interest rates. According to a Reuters poll taken on the 9 November, consensus forecasts estimate that the UK base rate will remain at the current 5.25% level until calendar Q3. From here consensus forecasts the base rate to decline over the final two quarters of 2024 to 4.5% and then to 4.0% by Q2 2025. Central Banks, including in the UK and US have been firm in stating that interest rates will be kept at least at their current levels until inflation is clearly on track to meet central banks targets. However, some influential rate-setters in countries including in the UK have added support to potential rate cuts in 2024 with data looking broadly supportive in late 2023 and early 2024.

The impact on Real Assets

Real assets, particularly those that seek to provide long-term income, have been heavily influenced by changes to monetary policy and this will likely continue in 2024. A large proportion of infrastructure and real estate investment valuations are directly or indirectly influenced by government bonds. This has been a negative influence over the past twelve months but could now start to create more favourable conditions. In the past, we have seen that increased confidence in the downward pathway in interest rates has supported lower long-term UK government bond yields and we saw some early evidence of this in the last two months of 2023. Traditionally, this has been a catalyst for the stabilisation of real asset capital values, before leading to a return to growth. The conditions for 2024 will likely be more supportive than much of 2023 for real assets, including listed infrastructure.

Returns when investing in Infrastructure

Whilst both heavily influenced, listed infrastructure is generally more sensitive to bond yields than listed real estate. Most sectors we target acquire assets with long-term cash flow streams, often with income linked to inflation meaning that the securities act as an indexed-fixed income proxy, in an equity wrapper. A number of the securities we have invested in saw their share prices negatively impacted by rising longer-dated UK government bond yields. Reducing bond yields will likely see many sectors see greater stability in their portfolio values in 2024. Income in the meantime has remained very resilient with many sectors seeing persistent income growth, often translating into growing dividends.

Whilst political risk is elevated in a general election year, UK infrastructure looks well supported by the two main Westminster parties. In October 2023, shadow chancellor, Rachel Reeves, stated that a Labour government would, “get Britain building again,” and plans would “accelerate the building of critical infrastructure for energy, transport and technology.” UK public debt remains highly elevated and though infrastructure has been an easy target for spending cuts such as in the early 2010s, there seems to be a greater understanding of the need for continued, well-targeted infrastructure investment, further creating confidence.

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TIME Investments is a trading name of Alpha Real Property Investment Advisers LLP which is the Investment Manager of the Fund with delegated authority from Alpha Real Capital LLP, the authorised corporate director of the Fund, both of which are authorised and regulated by the Financial Conduct Authority. Please note investors capital is at risk.