With interest rate cuts expected in several major economies, professionals say the outlook is relatively good for investment in infrastructure funds.

Speaking to InvestorDaily, Stephen Kempler, co-founder and portfolio manager for Global Listed Infrastructure at Maple-Brown Abbott, said monetary easing “will rarely ever be a tailwind for infrastructure”.

“Going into 2025, with the tailwind of potential rate cuts from central banks around the world, we are quite positive on the medium-term outlook for the asset class.”

These assets, he suggested, have been largely overlooked against the market's AI-driven rally and may now see renewed focus as interest rates fall.

"We believe valuations are not full at all, in fact they have really lagged global equities by quite a large margin over the last two years, so I think the starting point [of rate cuts] it really creates an infrastructure for consistent positive returns,” Kempler said.

Looking back over the past 18 months, he pointed out that the return gap between global listed infrastructure and global equities stood at more than 30 percent.

"We don't think the return differential is justified given the fundamentals of infrastructure assets, which should continue to post long-term earnings growth, even over this period," Kempler said.

About 40% of that divergence, he said, was due to the tech rally and the seven large-cap U.S. stocks.

Meanwhile, 50 percent is "largely unexplained" and can be attributed in part to a higher interest rate environment.

"It is our view that this return differential will narrow over time as listed infrastructure valuations generally become better understood by the market," he said.

In particular, Kempler said, because interest rate cuts cause a yield gap between infrastructure investments and lower-risk assets such as time deposits, the extension of the upcoming rate-cutting cycle could increase the attractiveness of infrastructure assets.

"[It] it naturally becomes much more attractive to a wider investor base than during peak interest rates when investors are perhaps a bit more cautious about these types of assets,” he said.

In a recent market note, Shane Hurst, portfolio manager at ClearBridge Investments, also highlighted that higher bond yields have weighed recently on infrastructure stocks, whose dividends must compete with bonds for income investors' equity.

Hirst explained that infrastructure stocks typically require a delay in moving through higher costs from interest rates to allowed returns (for regulated assets such as utilities) or long-term contracts (for user-paid assets such as toll roads and airports).

"However, infrastructure has historically outperformed global equities as interest rates have peaked, something to keep in mind as inflation indicators slow and allow major central banks to end their hawkish positioning and move to relief,” Hurst said.

"The outperformance of infrastructure over several time periods since the last rate hike in a cycle confirms our view that bond yields do not need to fall to outperform infrastructure," he said, adding that greater certainty about interest rates can be in support of infrastructure assessments and key thematic drivers.

Heading into a period of lower interest rates, Sarah Shaw, global portfolio manager and CEO of 4D Infrastructure, also believes the tide could soon turn on infrastructure.

"Sentiment should turn around, allowing stocks to revalue to fundamentals - we think this is inevitable as the US starts to taper in September and should be a tailwind through the back end of Q4 and into 2025." , she told InvestorDaily.

"It is interesting to note that the asset class underperformed in June as economic data was buoyant and proposed rate cuts will be pushed back again." In contrast, in July, when labor markets softened and rate cuts were back on the table, including talk of emergency cuts, infrastructure fared better.

"We truly believe this is the best time to add to a fundamentally cheap asset class as equity sentiment should turn in its favor."

While the fund manager will closely monitor the market's sensitivity to interest rate movements, Shaw said a key advantage of infrastructure "is that it can be fundamentally positioned for all points in the cycle".

That could mean an overweight allocation to consumer-paying assets, such as toll roads in buoyant economic environments, and an overweight to utilities in more depressed environments, she said.