Executive summary
Infrastructure is an important asset class in any balanced portfolio. It provides many attractive features including inflation-adjusted cash flows and diversification. The infrastructure itself also provides benefits to the communities it services. The amount of value created will have a dependence on the demographics of the area it serves.
The analysis in this paper follows the approach taken by Ammar and Eling (2015)[1] in examining specific sectors of the U.S. equity market as a proxy for infrastructure investments. It then uses the approach taken by Ang and Maddaloni (2005)[2], who analyze international equity returns, in order to examine the relationship between demographic structure and infrastructure returns.
Main Findings:
There is a significant relationship between demographic structure and infrastructure returns:
- a one standard deviation increase in the working-age population is associated with a 3.8% increase in infrastructure returns
- a one standard deviation increase in average age population is associated with a 2.9% decrease in infrastructure returns
- a one standard deviation increases in the population proportion that is over 65 is associated with a 5.6% increase in infrastructure returns
Conclusion
There is a significant relationship between demographic structure and infrastructure returns; this relationship is stable over time, but was overwhelmed by the impact of the 2008/2009 financial crisis and 2010-2012 Euro crisis; and there are no significant relationships (at the 5% level) for any other sectors of the equity market, with the exception of the Healthcare sector.
[1] Ammar, S. B. and M. Eling (2015). Common risk factors of infrastructure investments. Energy Economics 49, 257–273.
[2] Ang, A. and A. Maddaloni (2005). Do demographic changes affect risk premiums? Evidence from international data. The Journal of Business 78 (1), 341–380.