To modernize economies, it’s estimated the world will have to spend $3.7 trillion every year through 2035 on infrastructure. That’s the expected cost for all the types of infrastructure needed. But hungriest for capital (aside from roads) will be the newer types of infrastructure, such as sustainable electricity, fiber optics and data centers, that are now critical to the economic development of every country.1
We expect this need to create great opportunities for investors.
Governments around the world, long conscious of the need to invest in infrastructure, recently allocated to its development a meaningful portion of their record $10+ trillion stimulus response to COVID-19’s toll on their nations’ economies. Additional stimulus allocations to infrastructure are expected during the coming recovery.2 However, the pandemic has sorely stretched government budgets worldwide.
Private investors can be expected to take some of this slack, as the value proposition for investing in infrastructure assets is increasingly compelling. Indeed, we see three reasons why you may want to consider investing in infrastructure now:
- Potential for relatively high yield—J.P. Morgan estimates that private infrastructure assets of all types have offered a yield of roughly 7.2%, driven by predicable, long-term cash flows from assets such as regulated utilities and contracted power, backed by long-term contracts that include inflation escalators.
- Better potential returns than other asset classes—Our long-term analysis (next 10 to 15 years) expects a potential return of 6.1% with annualized volatility of 10.8%.3
- Expected growth—Clearly, there is great potential for growth in an infrastructure market requiring an annual investment of almost $4 trillion. And what’s driving this need is both multifaceted and relentless: increasing population and urbanization coupled with modern economies’ accelerating digitalization and efforts to increase sustainability.
While all types of investors may find infrastructure interesting, given how broad the asset class is, new infrastructure offers some of the most exciting investing potential. It also creates new avenues for sustainability investing, given that increasing our digital footprint creates a need to keep our carbon footprint in check.4
Here, we take a look at key innovations in digital, power and transport infrastructure that are already attracting investment dollars and are worth our ongoing attention.
$3.7 trillion a year of investment in economic infrastructure needed by 2035
Digital infrastructure: The fiber decade
The global “datasphere” is on track to quadruple during the next five years. No surprise, then, that companies and consumers are on a quest to efficiently store, retrieve and transfer all the data.
This megatrend should drive a significant expansion in the use of fiber in our connectivity networks, creating a “fiber decade.”
It’s not new to use fiber optic cables that achieve a typical top speed of 1 gigabyte per second (Gbps), which is five times faster than cable’s 200 megabytes per second (Mbps). However, fiber optic cables historically have been reserved for connections that are city-to-city, country-to-country and continent-to-continent (subsea).
What is new is that in this decade, fiber is expected to become ubiquitous: connecting homes, enterprises, data centers and 5G mobile networks. For example:
- Homes—More than 40 million U.S. homes (32% of the total) currently have a fiber-based broadband option from telecommunication companies. That number is expected to jump to 60 million (or 50%) in the next three to five years.5 While Europe has a similar penetration (an average of 34%), Germany’s current fiber-to-the-home (FTTH) penetration of 11% is expected to reach 59% by 2025 and more than 90% by 2030.6
- B2B—The global fiber optics market was worth just over $4 billion in 2019 and is set to grow to $7 billion by 2024.7 Currently, only 55% of enterprises are connected by fiber. But more companies are adopting artificial intelligence (AI) and machine learning (ML). They are therefore collecting and analyzing large data sets that require much more data processing power and much faster connectivity than are currently available.
- Data centers—As more information is outsourced to data centers over the next few years, the connectivity between data centers will become vital. Gartner projects spending on global data centers to reach $200 billion in 2021, up from an estimated $188 billion in 2020.8
- 5G—Telco carriers are investing in fiber assets to deliver 5G connectivity more widely. 5G currently covers 5% of the global population—a number that is projected to rise to 55%–65% by 2023. Deloitte estimated that the United States would require up to $150 billion of investment from 2017 to 2024 to support overall growth in the broadband networks and the wireless densification that will accompany the 5G rollout.9
Power infrastructure: The decarbonization decade
The number of large data centers in the world has doubled to 550 in the last five years. Together, they consume more than 2% of the world’s electricity and emit roughly as much CO2 as the airline industry. Electricity accounts for 26.9% of greenhouse gas emissions and transportation for another 28.2%.10
Governments worldwide are pushing for rapid “decarbonization” of both the transportation and electricity sectors. The 197 government signatories to the Paris Climate Accord—a legally binding agreement—are working toward net-zero carbon emissions by mid-century.11
This means the $20 trillion that needs to be invested in the global power sector infrastructure in the next 20 years should be decidedly titled toward renewables such as wind and solar. Indeed, in the next five years, $1.6 trillion will be invested in expanding wind and solar electricity generation capacity globally, or 53% of total capacity added.12, 13, 14
Transportation and logistics: The automation and electrification decade
The transportation and shipping industries will shift dramatically in the coming years with technological advances in passenger mobility, freight transportation, logistics automation and clean energy.
On the horizon are not only autonomous cars, but also autonomous cargo ships that dock themselves at ports where autonomous cranes unload containers onto automated vehicles. Rotterdam, one of the largest container ports in the world, already has most of this automation. The electric automated guided vehicles (AGV) in port even know when to take themselves to a battery station to recharge.15
For a medium-sized port, widespread automation could generate more than $1.5 billion in value.16
Electrification of the transportation and logistics industries will be key. Most the world’s largest deep-sea ships still rely on traditional energy sources. But Norway, for example, plans to equip its entire ferry fleet with all-electric or hybrid technology (for longer routes) by 2023. The new electric ferries in Norway were shown to reduce carbon dioxide emissions by 95% and operating costs by 80%.17, 18
The global shipping industry is researching a variety of cleaner or alternative fuels that could help decarbonize the industry, including hydrogen, ammonia, methanol and biofuels. Industry leaders currently see each alternative fuel having commercial or technical obstacles that still need to be solved.19
The global shipping industry would need to invest a total of $1 trillion to $1.4 trillion over 20 years between 2030 and 2050 in technologies that could reduce emissions by 50% by 2050.20
Which infrastructure investments might suit you?
It can be both enthralling and profitable to imagine, and help build, the future.
If you are interested in learning more and exploring whether investing in infrastructure might help you reach your personal financial goals, speak with your J.P. Morgan team.
To learn more about upcoming private investments, view the pipeline here.
1 “Bridging Infrastructure Gaps: Has the World Made Progress?” McKinsey & Company, October 2017. These days, when people say “infrastructure,” they may be referring to the traditional categories: highways, bridges, rail, transit, drinking water, storm water, wastewater, electricity, airports, seaports, inland waterways and the like. But they also might mean the new infrastructure: all the physical resources a society needs to use data and computerized devices, as well as facilitate digital methods, systems and processes.
2 “The $10 Trillion Rescue: How Governments Can Deliver Impact.” McKinsey & Company, June 2020.
3 J.P. Morgan Long-Term Capital Market Assumptions; data as of September 30, 2020.
4 For example: A typical Google search today emits 0.2 grams of carbon dioxide (CO2); and data centers account for 2% of global electricity consumption now. Meanwhile, data centers may grow to account for 15%–30% of total electricity demand in some countries by 2030. It’s expected that $20 trillion will need to be invested in the global power sector in the next 20 years to keep up with rising demand for electricity. And electrification of transport in the United States could raise U.S. electricity demand by 20% by 2050.
5 Source: J.P. Morgan Telecom research.
6 Bank of America Research, Deutsche Telecom, “The Fiber Decade,” November 16, 2020.
7 “As telecom demands grow, optical fibers will need to level up.” Chemical & Engineering News, March 16, 2020.
8 “Gartner Says Worldwide Data Center Infrastructure Spending to Grow 6% in 2021.” Gartner, October 7, 2020.
9 “Communications Infrastructure Upgrade: The Need for Deep Fiber.” Deloitte, July 2017.
10 Source: EPA, www.epa.gov/ghgemissions/sources-greenhouse-gas-emissions#:~:text=Transportation%20(28.2%20percent%20of%202018,ships%2C%20trains%2C%20and%20planes.
11 The Paris Climate Agreement includes a binding core agreement that governs the international process for universal climate change action. There are other parts of the agreement that are not legally binding at the international level, although may be binding on the national level. On his first day in the White House, U.S. President Joseph R. Biden signed an executive order that had the United States, one of the world’s largest emitters of greenhouse gases, rejoin the Paris Climate Accord.
12 “World Energy Outlook 2019.” International Energy Agency, November 2019.
13 Even that will not be enough to fulfill the Paris Climate Accord’s goal to limit global warming to well below 2 degrees Celsius and preferably to 1.5 degrees Celsius. A near doubling of investment in the power sector would be needed over the next 20 to 30 years. Source: Emissions Gap Report.
14 “New Energy Outlook 2020.” Bloomberg New Energy Finance, October 2020.
16 “The Future of Automated Ports.” McKinsey & Company, November 2018.
17 “Europe Takes First Steps in Electrifying World’s Shipping Fleets.” Yale School of the Environment, February 2018.
19 “Decarbonizing Shipping: All Hands on Deck.” Shell and Deloitte, July 2020.
20 “The Scale of Investment Needed to Decarbonize International Shipping.” Global Maritime Forum, January 20, 2020.