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Setting the investment agenda

29.10.2020

Monthly Agenda October 2020 - Alternatives

With decarbonisation now gaining significant traction with governments across the world many of the initiatives are likely to be relatively copper intensive. Copper is a key component for many renewable power generation projects such as wind and solar farm construction, related grid infrastructure, battery storage, and electric vehicle (EV) manufacturing. The Chinese government has set many ambitious targets such as 25% EV penetration by 2025 and has pledged to raise wind power generation by 50GW p.a. through 2025. As a result, Chinese imports of copper in recent months have surged to well above their long term average levels whilst prices remain elevated at $6,672 per metric tonne, up 34% from their lows in March. Citibank now see price hitting $7,000 by Q2 2021. 

Chart 14: Copper demand rises on clean energy developments

Enlarge Source: Bloomberg

 

Investor appetite for private market alternative investments remains strong despite the pandemic. After a slow start to the year given the heightened investor uncertainty activity picked up in the third quarter bringing the amount of capital raised year to date for 2020 to $348.5bn, although down from $388.3bn over the same period in 2019. The number of funds closing this year is down significantly on previous years as investors focus their attention and capital on the largest players in the market. The 10 largest funds that were closed year to date have accounted for almost 30% of all capital raised. The majority of private equity investors surveyed recently by Preqin stated they intended to increase their allocation to the largest private fund managers in their portfolios. 

Chart 15: Q3 Private Equity fundraising activity picks up

Enlarge Source: Private Equity International

 

With bond yields sitting close to historic lows investors searching for yield are forced to look further out the risk spectrum to achieve the same level of return. Infrastructure is one area where dividend yields have remained relatively stable in recent times. The sector is also exposed to some of the biggest secular growth stories of our time from renewable energy, 5G and improvements in data infrastructure as well as the aging populations in developed nations all requiring significant investment. The spread of the MSCI All World Infrastructure Index dividend yield over US 10 year bond yields has widened to 349bps from 118bps in October 2018. 

Chart 16: Infrastructure dividend yield spread over bonds widens

Enlarge Source: Bloomberg

 

 

Darragh Kennelly
Investment Analyst

 

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