Market insights

Weekly market commentary

20.05.2024
  • BlackRock Investment Institute

Mega forces: infrastructure required

Market take

Weekly video_20240528

Christian Olinger

Opening frame: What’s driving markets? Market take

Camera frame

Major infrastructure needs sit at the intersection of mega forces - the structural shifts driving returns now and in the future.

This week we spotlight investment opportunities where these structural shifts converge.

Title slide: Mega forces: infrastructure required

1: Demographic divergence

We see opportunities arise where capital investment has not kept up with population growth.

Emerging markets, like Saudi Arabia, will need more capital spending to support their growing working-age populations. Yet aging developed markets could see infrastructure demand shift away from industries tied to a growing population.

2: Artificial intelligence and digital disruption

Digital disruption and AI are already creating a massive and immediate need for power and data center infrastructure. AI-related data center investment could grow 60-100% annually in coming years. This buildout has investment implications that extend far beyond first-line tech beneficiaries – reaching beneficiaries further up the supply chain like utilities, energy, materials, industrial equipment and real estate, as well as those adopting the tech.

AI’s energy needs could magnify the already massive investment likely to be needed in the low-carbon transition.

3: Geopolitical fragmentation

Geopolitical fragmentation is powering infrastructure demand as supply chains rewire. We prefer countries like India and Mexico that boast valuable natural resources and benefit from reshoring.

Outro: Here’s our Market take

Infrastructure sits at the intersection of most of the five mega forces we track. We have exposure to beneficiaries of the infrastructure boom on a tactical horizon of six to 12 months. We like infrastructure equity on a strategic horizon.

Closing frame: Read details:

www.blackrock.com/weekly-commentary.

Infrastructure at the fore

Mega forces are creating major infrastructure needs. We find the most investment opportunities today in places where multiple mega forces intersect.

Market backdrop

US stocks were flat near record highs last week, with strong results from one key AI-related company helping buoy the market. US 10-year yields rose.

Week ahead

We watch April US PCE data this week for any signs that services inflation is easing. We see it running too hot for inflation to fall to the Fed’s 2% target. 

Infrastructure sits at the intersection of mega forces – the structural shifts driving returns now and in the future. Take artificial intelligence (AI): AI is driving capital spending partly due to technological competition among countries, and the buildout of power-hungry data centers is now affecting the energy transition, too. We stay overweight the AI theme. The rewiring of supply chains benefits countries like India and Mexico. In private markets, we like infrastructure equity strategically.

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Investment-demographic link

G20 population and investment growth, 2000-2019

The chart shows that the faster a population grows, the faster capital investment grows. Emerging markets, like Saudi Arabia, will need more capital spending to support their growing working-age populations.

Source: BlackRock Investment Institute, World Bank Development Indicators, UN, with data from Haver, March 2024. Note: The chart shows the relationship between average population growth and average real investment growth, as measured by the gross fixed capital formation component of GDP, between 2000 and 2019. The chart includes data up to 2019 to avoid the pandemic’s distortion of the data.

Demographic divergence – a mega force that most investors don’t think about from a capital spending perspective – shapes infrastructure needs across economies. Typically, the faster a population grows, the faster capital investment grows. See the chart. Opportunities arise where investment has not kept up with that growth. Emerging markets (EMs), like Saudi Arabia, will need more capital spending to support their growing working-age populations. In developed markets (DMs), how countries adapt to aging will dictate investment. Many are rolling out measures to help offset stagnating or even shrinking workforces, with countries such as South Korea investing in AI-driven automation. And infrastructure demand could shift away from industries tied to a growing population. We eye potential mispricings as markets can fail to price in even predictable structural shifts – until they hit.

Digital disruption and AI are already creating a massive and immediate need for power and data center infrastructure. AI-related data center investment could grow 60-100% annually in coming years, according to a mix of forecasters including the International Energy Agency. We don’t think broad valuations fully reflect this boom. The investment implications of this buildout extend beyond first-line tech companies – reaching beneficiaries further up the supply chain like utilities, energy, materials, industrial equipment and real estate, as well as those adopting the tech. We are overweight the AI theme broadly.

AI’s energy needs could magnify the already massive investment expected in the low-carbon transition. Many mega-cap tech firms doing the largest AI buildouts have net-zero targets – that could drive up demand for renewable energy. Our BlackRock Investment Institute Transition Scenario estimates energy system investment will hit $3.5 trillion per year this decade – and $4.5 trillion by the 2040s. Low-carbon investment would then account for up to 80% of energy spending, up from 60% now.

The geopolitical story

Geopolitical fragmentation is powering infrastructure demand across sectors and countries. Supply chains are becoming more complex as some countries increasingly act as intermediate trading partners. We get granular in EMs, preferring India and Mexico as they benefit from a rewiring of supply chains or companies bringing production closer to home.

We think private markets play an important role in the new regime marked by greater macro uncertainty and higher inflation. We see them bridging the gap between infrastructure needs and what governments can do on their own, given elevated debt levels in many countries coming out of the pandemic. We are overweight infrastructure equity on a strategic horizon of five years and longer. Compared with other pockets of private markets, infrastructure equity has reasonable valuations at higher interest rates, features steady earnings and offers cash flows often linked to inflation in what we expect will be a world of persistently higher inflation. Private markets are complex, with high risk and volatility, and aren’t suitable for all investors.

Our bottom line

Infrastructure sits at the intersection of mega forces. We stay overweight the AI theme, including beneficiaries of the infrastructure boom on a tactical horizon of six to 12 months. We like infrastructure equity on a strategic horizon.

Market backdrop

US stocks were flat last week near record highs, with upbeat Q1 earnings for one key AI-related company supporting equities. We keep our overweight to the AI theme. Stock market volatility is easing, with the VIX index of S&P 500 implied volatility hitting its lowest levels since 2019. US 10-year Treasury yields ticked up to near 4.45% on a stronger-than-expected services PMI and a drop in weekly jobless claims – but are still down about 30 basis points from this year’s highs.

The release of April US PCE data – the Federal Reserve’s preferred measure of inflation – is the main data event this week. We monitor the data for any signs that services inflation is easing. The US CPI data for April showed core goods prices falling further, so recent upside surprises on the PCE measure may be one-offs. Yet services inflation is proving volatile and remains well above a pace consistent with inflation settling at the Fed’s 2% target in the medium term.

Week ahead

The chart shows that gold is the best performing asset year-to-date among a selected group of assets, while the German 10-year bund is the worst.

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from LSEG Datastream as of May 23, 2024. Notes: The two ends of the bars show the lowest and highest returns at any point year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in US dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE US Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (US, Germany and Italy), Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index and MSCI USA Index.

May 28

US consumer confidence survey; Japan service PPI

May 30

Euro area unemployment data

May 31

US PCE; euro area flash inflation data; China NBS manufacturing PMI

Read our past weekly commentaries here.

Big calls

Our highest conviction views on tactical (6-12 month) and strategic (long-term) horizons, May 2024

Note: Views are from a US dollar perspective, May 2024. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.

Tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, May 2024.

Legend Granular

Our approach is to first determine asset allocations based on our macro outlook – and what’s in the price. The table below reflects this. It leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns. The new regime is not conducive to static exposures to broad asset classes, in our view, but it is creating more space for alpha. For example, the alpha opportunity in highly efficient DM equities markets historically has been low. That’s no longer the case, we think, thanks to greater volatility, macro uncertainty and dispersion of returns. The new regime puts a premium on insights and skill, in our view.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a US dollar perspective, May 2024. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

Euro-denominated tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, May 2024.

Legend Granular

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a euro perspective, May 2024. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

Meet the authors
Jean Boivin
Head – BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist — BlackRock Investment Institute
David Giordano
Global Head of Climate Infrastructure – BlackRock
Christian Olinger
Portfolio Strategist – BlackRock Investment Institute

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Sources: Bloomberg unless otherwise specified.

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