Deglobalisation 2.0: Infrastructure

Megatrends don’t stand alone; they interact. The digitalisation of society and the infrastructure assets that underpin this are also subject to the forces of deglobalisation.  

Recent geopolitical developments have served to highlight the issues surrounding data sovereignty and residency. It was previously estimated that more European data was kept in the US than in Europe itself[1]. With rising GenAI adoption, the concerns surrounding AI sovereignty – i.e. the control over data and technology underpinning artificial intelligence – are becoming more prevalent.  

The key implication of these concerns for investors is the increasing likelihood of Europe acting to retain its data within its borders, increasing local data centre (i.e. digital infrastructure) demand. This has motivated developers to build where local capacity is underserved. We anticipate data and AI sovereignty to drive a more even split of future data centre growth across the US, Europe and APAC than before, where Europe could see more investment opportunities.  

We also believe it’s possible deglobalisation contributes to further innovations in AI. For example, China’s DeepSeek[2] may not have developed its highly efficient AI model if it were not subject to US restrictions on AI chips. Geopolitical developments do create some uncertainty.

In the US, tariffs could particularly impact new-build data centre developments and platforms, in our view. The cost of key imported components could rise, while large-scale deportations could increase labour costs, reducing turnkey development profit margins (albeit from a healthy starting point). On the other hand, these higher development costs could pass through to higher subsequent transaction pricing and rental growth in primary markets with strong demand profiles.

For stabilised data centre assets, however, we see impacts being less pronounced. On the one hand, increased equipment costs from tariffs could require increasing maintenance capex for these facilities. Saying this, delays to new capacity coming online due to rising costs and labour shortages could support stable leasing rates, which could screen attractively to investors.  

We believe larger providers of fibre networks will continue their rollouts as fixed data traffic demands grow. Higher labour costs, however, could also challenge smaller fibre players, perhaps spurring consolidation.

Challenges in telecoms equipment supply chains could impact new US tower leasing[3], and both European and US tower valuations could see more volatility given their sensitivity to the interest rate environment. Despite these challenges, the long-term stable fundamentals of towers during macroeconomic uncertainty could screen attractively to investors, with data access increasingly seen as a necessity in the modern economy.

While we expect the digital infrastructure investment landscape to continue shifting rapidly, we have strong conviction around two key areas.  

Firstly, we believe data and AI sovereignty concerns will continue to even out regional data centre buildout rates, particularly boosting data centre deployment in Europe. Secondly, we believe investors will continue to recognise increased policy and technology-driven risks around US data centre return projections, which could manifest in higher risk premia versus historical averages for US data centre assets in the medium term.  

The varying degrees of impact across digital infrastructure highlight the need to manage concentration risk and the importance of diversification[4] across both the asset class and different geographies.  

[1] Morgan Stanley Research, 27 February 2024
[2] For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an L&G portfolio. The above information does not constitute a recommendation to buy or sell any security.
[3] ‘What Effect Will Trump’s Tariffs Take on Telecom?’, Inside Towers as of December 2024
[4] It should be noted that diversification is no guarantee against losses in a declining market.