Just as power, water and road infrastructure are essential for us to live our everyday lives, so digital equipment and systems are becoming equally important. But it was the global pandemic which really highlighted the importance of this area to society.
For example, while many of us knew doctors and nurses were seen as key workers during the pandemic – did we all know that people working in mobile towers and data centres were given the same status?
In fairness, we were not completely blind going into the pandemic. For almost two decades, the US government has classed digital infrastructure as ‘critical infrastructure’ – an integral component to the functioning of modern-day society and its economy.
But the events of the past two years really have accelerated the trend as the demand placed on networks, data storage and processing facilities has been growing significantly as internet and device connections and the usage of new data-intensive technologies have expanded.
By 2025 we could see as many as 5,000 digital interactions per user per day – that’s astounding when you think about it. Despite this, our digital infrastructure is way behind where it needs to be. For example, more than half the global population is still unable to access the internet.
And there is a two-speed growth dynamic taking place within digital infrastructure globally. On one level you have Western countries looking to move from 4G to 5G. While they have good existing digital infrastructure, it needs to be both upgraded and expanded. Faster downloading of items or improving online gaming are examples which come to mind.
The other part of the story is emerging markets. Many of them are moving from 2G to 3G but they won’t have the mobile towers or data centres the developed world has, so the story is only just kicking into gear.
According to a McKinsey Global Survey of executives, their companies have accelerated the digitisation of their customer and supply chain interactions (as well as their internal operations) by three to four years, while the share of digital or digitally enabled products in their portfolios has accelerated by seven years.
To put this into context, figures show that in December 2019, the percentage of digital customer interactions stood at 36%. This rose to an astounding 58% by July 2020. I expect those figures will have fallen slightly as the world economy re-opens but will be nowhere near the original figure again.
Importantly, the pandemic has created a paradigm shift in many of our work and living patterns. As M&G Global Listed Infrastructure manager Alex Araujo said: “The shift will be somewhat permanent with more flexible working arrangements, and, in some cases, digital infrastructure will replace the need for transportation infrastructure, where people choose to hold meetings virtually rather than face-to-face, at least in the short-to-medium term.
“Where we end up long-term is still an open question but there is no doubt digital infrastructure will have an increasing level of importance and influence in our work and even how we entertain ourselves.”
Clearly, more needs to be done. An Ernst & Young report in collaboration with the Digital Infrastructure Providers Association (DIPA) estimated the sector needs an investment of up to $23bn by 2025, to support the growing demand for digital services and rising online traffic.
The report found as many as 330 million people will be using 5G, while sectors such as e-commerce, education and healthcare will grow their presence online. To meet the demand, it says investment in the range of $7-$9bn each for macro tower additions and fibre deployments, $2-3bn for outdoor small cells which will be important for 5G the roll out, $500-800m in Wi-Fi and in-building solutions, $500-700m in edge data centres and $500m in data centres.
In many parts of the world, including wealthy nations such as the US, the UK and Germany, companies are scrambling to build the networks needed to keep up with this explosion in data generation and usage.
The so-called Fourth Industrial Revolution, in which digital technologies pervade every area of life, is well under way.
This huge rise in data usage has come in tandem with a need to replace old copper and fibre optic cables – so the story is about both growth and renovation. As Matthew Norris, head of real estate securities at Gravis points out – in just one minute on the internet, there will have been 5.7 million google searches conducted and 272,000 apps and games downloaded.
Simply put, we need the physical networks to enable that transmission – it needs to grow, and fast.
The tailwinds behind digital infrastructure are immense. Funds like Schroder Digital Infrastructure or M&G Global Listed Infrastructure are ideal starting points, with both also offering clients an attractive income too. Another consideration is VT Momentum Diversified Income fund, which has exposure to the asset class through a couple of specialist trusts.
Darius McDermott is managing director of Chelsea Financial Services and FundCalibre. The views expressed above should not be taken as investment advice.