Transportation: a sector on the move
By Emmanuel Faucquez, Senior Fund Manager, Infrastructure Debt, at Schroders
The resilience and ongoing evolution of this economically core sector mean it continues to offer key portfolio benefits for infrastructure debt investors.
In recent years there has been a pronounced focus on megatrends, with fibre networks, data centres and renewables all sought after assets. Yet the silent backbone of economic activity – transportation infrastructure – deserves renewed attention.
Before discussing the sector’s merits and evolution, it’s worth re-emphasising the benefits of diversification in prudent credit investing. Including an economically core infrastructure exposure such as transportation can help reduce overexposure to risks related to regulatory changes, ramp-up uncertainties and valuation bubbles observed in sectors such as digital infrastructure and renewables.
Transport infrastructure delivers classic infrastructure attributes: a portfolio of long-life and indispensable assets that have endured all forms of market dislocations. Covid was perhaps the most severe test of its resilience. Most assets have since recovered strongly, with operational and financial metrics now exceeding pre-pandemic levels in many regions.
Many transportation assets benefit from availability-based public-private partnership (PPP) contracts or concession agreements, which help reduce exposure to fluctuating user volumes. Further, transport infrastructure often includes inflation-linked contractual elements or tariff adjustment mechanisms, which serve as natural hedges in inflationary and elevated interest rate environments.
Tariffs and geopolitical tensions are of concern for investors globally. For transport, this manifests via trade flows through ports and airports. Industry consensus suggests, however, that tariffs are a secondary concern relative to larger shifts such as supply chain reconfiguration and nearshoring, which may alter but not eliminate demand.
Regardless, what is unquestionable is transportation infrastructure’s fundamental role in supporting economic activity and functioning of supply chains.
The future is electric and green
Emerging themes are broadening transportation’s appeal. In Europe for example, strong policy support is driving modal shifts from road to rail. Rail investment opportunities are growing, with new operators entering markets, accelerating electrification programmes.
Rolling stock leasing is evolving beyond asset finance into mainstream infrastructure, enabling low-carbon mobility transition. Urban bus fleet electrification is surging, backed by public contracts and EU green stimulus, creating both greenfield and refinancing opportunities. Simultaneously, electric vehicle charging, digital traffic management systems and port automation infrastructure are creating the foundations of future core assets.
With decarbonisation being driven by increasingly stringent environmental regulations, vast investments are underway, for example, to deploy hydrogen buses and develop sustainable aviation fuels. From a credit perspective, early adopters benefit from improved access to capital, while laggards are subject to potential stranded asset risk.
These growth areas require careful evaluation since business models can still be nascent, contract lengths tend to be shorter, and utilisation is tied to evolving consumer behaviour and technology adoption. Credit investors should consider the risk/return, based on lending horizons.
The road to resilience
The transportation sector is back on track. Its diverse asset mix and ongoing evolution present investment opportunities that can deliver several portfolio benefits; building resilience, cushioning against other sector-specific shocks and improving the likelihood of non-correlated performance.
Transportation assets are also generally not subject to the valuation premiums that have been prevalent in in sectors such as renewables or digital infrastructure, further strengthening their appeal from a relative value perspective.
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