Infrastructure Investments and Inflation in Emerging Markets - Ardl Approach

Abstract

Background and Statement of the problem: Protecting the purchasing power of investors' wealth is one of the key goals pursued by money and fund managers. As such, the hunt for investments, assets and commodities which can shield financial market participants from the ravaging effects of inflation is always on. It is claimed that infrastructure investments are characterized by superior returns, less volatility and inflation linked returns relative to comparable assets. This study examined the extent to which infrastructure investments (as a new asset class) can act as a hedge against inflation in emerging markets. Research methodology and data: Autoregressive Distributed Lag (ARDL) model was adopted to capture the long- and short-run hedging ability of infrastructure investments. Data were obtained from MSCI Global and Central Banks of 24 emerging nations. Research findings: In the short run, listed infrastructure investments proved to be a good inflation hedge. In the long run, both listed and unlisted infrastructure investments proved to be poor inflation hedges. The results imply that both listed and unlisted firms do not adjust their revenues in line with inflation trends in the long run. Policy implications: Investment policy designers are therefore expected to look beyond infrastructure investment in their quest to hedge inflation in emerging markets. Investors need to be cautious given that regulatory regimes are dynamic and that previously monopolistic infrastructure firms might lose their edge as well as their pricing powers. Investors and fund managers are encouraged to include both listed and private infrastructure in the same portfolio as they play a complementary investment role.