by Joseph Titmus
Listed infrastructure has historically delivered very dependable returns through a variety of market conditions and has proved remarkably independent to the performance of the broader equities market.1
This is understandable, given the unique risk-return character of the asset class. The stability that attracts investors to infrastructure is generated by cash flows which are typically supported by regulation or long-term contracts. The essential nature of many of the basic assets owned by infrastructure companies also tends to provide resilience to the economic cycle.
A different story through 2020
Those defensive attributes haven’t been strongly on display through 2020, however. In our view, listed infrastructure fell and recovered in line with equities through the first two quarters of the year, but in recent months has started to tread water, underperforming stock markets as they surged through to September.
The reasons behind this pattern become clear if we examine the various components of listed infrastructure at a sector level.
Listed infrastructure portfolios can generally be broken up into four components: the more cyclical communications and energy sectors, and the more defensive transportation and utility sectors. This categorisation may have held true in previous financial crises, but it completely defies what we’ve experienced during the pandemic. Dramatically lowered patronage has impacted demand for transportation in particular, whilst on the other hand the way in which we employ communications technology has been altered fundamentally, and the sector has held up exceptionally well over the course of the year. Energy stock performance has been hit hard by the pandemic, but also by other factors leading to the oil price crash through the first five months of the year.2
Why invest in global listed infrastructure now?
In a word, value. In recent months value has been harder to obtain across the broader stock markets, but you’ll find it in abundance in listed infrastructure. This is mostly related to the fact that prices have substantially over-reacted to the downside of COVID-19.3 We estimate, for example that two-thirds of the decline in share prices from December 2019 to March 2020 was due to valuation, rather than reduced cash flows.
A perfect case in point are companies that own key oil storage assets, where demand for tank space has actually increased due to falling spot oil prices yet stock prices have fallen in line with the broader energy sector.
Our valuations for a range of infrastructure assets we consider are now more attractive than they were pre-COVID, whilst fundamentals remain robust, and opportunities for investors still exist.
Our outlook for infrastructure
We currently see returns from the listed infrastructure asset class as slightly below their historical levels but respectable, given the wider context affecting markets. Within the asset class, our view is that energy infrastructure offers the greatest opportunities, and should provide total returns in the high single-digits to low double digits, with 6-8% of that coming from dividend yields.
With regards to the other sectors, we believe there is strong value to be found in transportation for those willing to focus on long-term value rather than short-term multiples, but little left in communications. The advent of COVID-19 has obviously accelerated expectations in this sector dramatically, but in our view cash flows aren’t keeping pace with increasing market valuations. Utilities may not have been as resilient as many expected to a crisis of this nature, particularly in the US, but we think there is still value to be found here post the COVID-19 market correction.
We believe the bottom line for investors is the need to shift focus from the effects of COVID-19, which should largely be factored in, to the opportunities provided by this disruption.
1. Bloomberg, AMP Capital
2. Bloomberg, AMP Capital
Author: Joseph Titmus, Portfolio Manager/Analyst, Global Listed Infrastructure Sydney, Australia
Source: AMP Capital 14 Oct 2020
Reproduced with the permission of the AMP Capital. This article was originally published at AMP Capital
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