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Technological and green infrastructure advancements spur growth in real assets

The U.S. economic backdrop will likely go through profound changes in the years to come, to a large degree due to the COVID-19 experience, but also due to trends that were already in motion and were accelerated as a result. The infrastructure investment bills contemplated by the Biden Administration and the U.S. Congress will likely provide financial backing to boost this progression, but we expect private capital to supplement what looks to be a large infrastructure capital expenditure wave, owing in part to decades of underinvestment.

In addition to the obvious technology and communication advancements, industry sectors such as energy, housing, retail, and transportation were already evolving rapidly along the technology and climate-friendly spectrum.  Environment, Social, Governance (ESG) initiatives effectively introduce a major influence on investors that could last for years to come, advanced by the large millennial demographic, who tend to have a higher acceptance to change, along with the Generation Z following them. The last time such a large demographic group reached their peak earnings years was also the last period of elevated and sustained economic inflation in the U.S. economy. Of course, this doesn’t guarantee a repeat of this phenomenon, but it is on the top of investors’ minds, as is the current low interest rate environment. The sweet spot might be a real asset investment that carries with it a current income component and the potential for an equity upside as these industries move forward along the technology and green spectrum. 

Energy infrastructure

In our view, the backbone of the U.S. economy is in energy and physical infrastructure, which drive the engine so to speak. The wildfire-related blackouts in California last year and the Texas Uri winter storm this year vividly highlighted this, while also demonstrating the need for infrastructure investment. The energy sector blurs the distinction with “tech,” as the future of the industry is proceeding towards a low-carbon emission, renewable goal that will likely require and attract billions of investment capital dollars in new technology. The industry already can lay claim to the U.S. becoming one of the few larger countries in the world to reduce carbon emissions since 2014. This has been primarily due to the transition from coal-generated base load electricity to natural gas plants with little if any give-up in cost to the ratepayers. Going forward, a further transition is evolving towards new developments in solar, wind, battery, hydrogen, and other renewable technologies. Even advanced nuclear technology may have a place as a carbon friendly but reliable baseload technology. Carbon capture may also introduce a “green” method to extend reliance on natural gas in the future. 

We are optimistic that the U.S. has the right mix of public/private, regulated/non-regulated organizations to implement the transition to renewable energy over the decades to come. The investment options for this transition are many, and we believe the public markets provide an efficient, liquid avenue to participate in this generational change. The electric utility industry is an example of this. Though a portion of the public companies are highly regulated on both state and federal levels, they provide a programmatic approach to implement current and future zero carbon emission technology that maximizes the synthesis of renewable resources, primarily solar and wind, to generate electricity. The electric utility industry is embarking on this opportunity by installing new generation battery storage in what could be even more disproportionate growth.  These companies are compelled by regulators, as most U.S. states have instituted renewable mandates through their regulatory bodies.

Percentage of generation: 2021 compared to 2016 

% U.S. Net Generation January 2021 trailing 12 months

% U.S. Net Generation January 2016 trailing 12 months

Source: U.S. Energy Information Administration as of 01.31.2021

Physical infrastructure

Pre-COVID, Commercial Real Estate was already incorporating major initiatives to become more “green,” as it had proven to be as economically prudent as it was environmentally responsible. Developers appear to provide the next generation of structures that incorporate the new wave of “smart” technology in everything from office towers to apartment buildings. However, proliferation of data centers and wireless towers may ultimately have more impact. Despite seemingly occurring in the background, these developments serve as the nerve center of the data superhighway through the wireless spectrum and fiber networks. The huge amount of computing power extending from the consumer to corporate enterprise network traffic is expected to continue to push investment in communications infrastructure, which also puts pressure on the demand side of the infrastructure grid. 

The epidemic-driven lockdowns fueled a massive work-from-home transition, accelerated home shopping (and banking, meal delivery, etc.) transactions. This effectively replaced in-person activity from bricks and mortar retail to the Internet, and the major logistics warehouse networks responded to provide the now ubiquitous overnight retail delivery demand. An entire new generation of distribution facilities (some complete with robotics) are the effective bricks and mortar replacement for retail and are being developed nationwide.

Structural innovation incorporating multiple advancements has filtered into residential real estate with smart home devices (live), shared working environment-designed office layouts (work), and countless gaming and social networks (play). This live, work and play construct has prompted many new apartment and housing associations to incorporate these networks within the complex infrastructure not only to improve productivity but also to enhance the overall resident experience. On a practical basis, this “Internet of Things,” such as lighting systems and thermostats, also deliver energy savings. Developers and operators have found that from the millennial demographic on down, these types of experiences are expected. Office (co-working spaces), industrial, data center, and wireless towers, to name a few, also are rapidly incorporating the latest smart devices. Further along, charging platform installations for the expected growth in electric vehicles (EVs) are already underway in both commercial and residential settings. For infrastructure investors, we believe that the fiber/wireless access and reliable green/renewable power installation that could provide the platform for these forward-looking, environmentally efficient technologies are not an option, but a requirement in the future for a long-lived asset.

In summary, we believe current income streams generated by real assets, the potential for growth of those income streams (inflation capture), and the liquid nature of the publicly traded investments relative to other hard asset (i.e., commodity or private equity) investments are all desirable attributes to this investment approach.  An asset portfolio structured with infrastructure companies that provides the base for contracted revenue must continually evolve with the technological advancements, highlighting the importance of active management as the infrastructure wave drives investment. Real asset classes are becoming more intertwined and reliant upon one another, and we believe that understanding how this drives demand and future investment requires broad knowledge across the spectrum. Recognition that all industries are essentially now tech industries and green initiatives are an essential part of future investments, requires constant research and surveillance for successful real asset investment.

Sources: Securian Asset Management, Inc, U.S. Energy Information Administration

The opinions expressed herein represent the current, good faith views of the authors at the time of publication and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such. The information presented in this article has been developed internally and/or obtained from sources believed to be reliable; however, Securian AM does not guarantee the accuracy, adequacy or completeness of such information. Predictions, opinions, and other information contained in this article are subject to change continually and without notice of any kind and may no longer be true after the date indicated. Any forward-looking statements speak only as of the date they are made, and Securian AM assumes no duty to and does not undertake to update forward-looking statements. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Actual results could differ materially from those anticipated.

Securian Asset Management, Inc. is a subsidiary of Securian Financial Group, Inc.

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DOFU 7-2021
1705022