Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 463

Listed infrastructure: finding a port in a storm of rising prices

I recently returned from a two-week, coast-to-coast trip across the United States, talking to institutional clients, pension funds and investment consultants. The mood on the ground is one of caution. Rising inflation and interest rates are on everybody’s mind. A war in Europe and spiking oil prices are creating uncertainty. And the possibility of recession hovers at the edge of conversations. During such a period, it’s easy to wonder if there are any safe ports in the investment storm.

In this environment, we believe that infrastructure has an important role to play in portfolios. Investments in assets such as toll roads, airports, railroads, utilities and renewables, energy midstream, wireless towers and data centres show their worth in such times. These types of investments have high barriers to entry, structural growth and strong pricing power, giving them the potential to withstand inflation and generate consistent earnings, regardless of the broader economic backdrop.

With this in mind, below are three reasons we believe infrastructure investors may be well-placed to weather the geopolitical storms ahead.

1. Infrastructure runs its own race - Recent performance has seen the asset class hold up relatively well as global equities sold off, consistent with its history of providing most of the upside in rising equity markets but offering protection from falling ones. This pattern of performance is underpinned by global listed infrastructure’s consistently strong pricing power, predictable cash flows, and relative immunity to economic cycles.

This ability to hold up in falling markets has enabled the asset class to generate higher returns than global equities over the past 20 years, with less risk, as measured by standard deviation of returns.

2. Infrastructure is a price maker, not a price taker - Global listed infrastructure has historically outperformed global equities against a backdrop of high inflation[1]. This is a reflection of the fact that infrastructure’s tangible assets provide essential services, using contracted or regulated business models.

These assets consistently demonstrate the ability to pass though the effects of higher input costs and inflation, to the end user. This can be achieved in several ways – for example by allowing utilities to earn regulated real returns; or via contracts which explicitly link tolls and tariffs to the inflation rate; or as a result of regional oligopolies’ robust industry structures allowing inflation pass-through.

Australian-listed Transurban, for example, is a beneficiary of improving traffic volumes that have rebounded following the lockdowns of the last two years, while the concession terms on the vast majority of its road networks allow tolls to be raised by the rate of inflation.

Infrastructure’s capital-intensive nature provides high barriers to entry which have allowed incumbent operators in other sectors, such as mobile towers and freight rail, to achieve similarly robust pricing results even without explicit inflation links. Our analysis has found that more than 70% of assets owned by listed infrastructure companies have effective means to pass through the impacts of inflation to customers, to the benefit of shareholders. This number is closer to 80% for our portfolio today.

Further, the value of infrastructure assets can generally be expected to rise during inflationary environments. Existing infrastructure assets become more attractive as the replacement costs increase. This factor gives infrastructure assets enhanced appeal during periods of high inflation.

3. Infrastructure taps into the big themes – Many of the mega-trends shaping today’s world have infrastructure at their heart. Decarbonisation is a good example – as the world looks to reduce greenhouse gas emissions, we need more renewable energy generation, distribution and storage facilities. Similarly, the growth of electric vehicles demands widespread electrification and public charging infrastructure, which investors can support by allocating capital to its development.

Midwest US electric utility Xcel Energy has been one of the most active electric utilities in the US transport electrification space. It plans to invest around US$2 billion to support 1.5 million electric vehicles by 2030, through infrastructure such as charging stations and grid upgrades.

The move to renewable energy is reshaping the dynamics of the utilities sector, which has traditionally been seen as a defensive but typically lower-growth segment of the market. However, these types of assets, which account for around half of the listed infrastructure opportunity set, are now seeing a shift driven by the investment opportunities presented by the build-out of renewable energy. Some utility companies are ramping up annual earnings growth forecasts from a 4-6% range to 5-7% or even 6-8%.

For example, Texas-based CenterPoint Energy is focused on achieving its net-zero goals by 2035 by building out its renewable resources and retiring coal plants. The company now expects to grow earnings per share by between 6% and 8% each year between 2022 and 2030, as it earns a return on the extensive work that it will carry out in this area.

Digitalisation is another key theme. Ever-increasing demand for wireless data / connectivity continues to underpin steady earnings growth for Towers and Data Centres, insulating them from the ebbs and flows of the broader global economy. The changes required during the pandemic have already led to a greater reliance on wireless data in many people’s everyday lives. The adoption of 5G technology over the medium term will require networks to handle increased data speed, and a much higher number of connected devices.

While global markets remain unpredictable, we are confident in global listed infrastructure’s ability to benefit from these structural themes over the long term.

[1] Source: First Sentier Investors and Bloomberg, as at 26 May 2022.

 

Trent Koch is Portfolio Manager, Global Listed Infrastructure at First Sentier Investors (Australia) Ltd, a sponsor of Firstlinks. This material contains general information only. It is not intended to provide you with financial product advice and does not take into account your objectives, financial situation or needs.

For more articles and papers from First Sentier Investors, please click here.

 

RELATED ARTICLES

Inflation: friend or foe of Value stocks in 2022?

Infrastructure assets are well placed for inflation era

The three prices that everyone should worry about

banner

Most viewed in recent weeks

Too many retirees miss out on this valuable super fund benefit

With 700 Australians retiring every day, retirement income solutions are more important than ever. Why do millions of retirees eligible for a more tax-efficient pension account hold money in accumulation?

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Is the fossil fuel narrative simply too convenient?

A fund manager argues it is immoral to deny poor countries access to relatively cheap energy from fossil fuels. Wealthy countries must recognise the transition is a multi-decade challenge and continue to invest.

Reece Birtles on selecting stocks for income in retirement

Equity investing comes with volatility that makes many retirees uncomfortable. A focus on income which is less volatile than share prices, and quality companies delivering robust earnings, offers more reassurance.

Welcome to Firstlinks Election Edition 458

At around 10.30pm on Saturday night, Scott Morrison called Anthony Albanese to concede defeat in the 2022 election. As voting continued the next day, it became likely that Labor would reach the magic number of 76 seats to form a majority government.   

  • 19 May 2022

Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.

Latest Updates

SMSF strategies

30 years on, five charts show SMSF progress

On 1 July 1992, the Superannuation Guarantee created mandatory 3% contributions into super for employees. SMSFs were an after-thought but they are now the second-largest segment. How have they changed?

Investment strategies

Anton in 2006 v 2022, it's deja vu (all over again)

What was bothering markets in 2006? Try the end of cheap money, bond yields rising, high energy prices and record high commodity prices feeding inflation. Who says these are 'unprecedented' times? It's 2006 v 2022.

Taxation

Tips and traps: a final check for your tax return this year

The end of the 2022 financial year is fast approaching and there are choices available to ensure you pay the right amount of tax. Watch for some pandemic-related changes worth understanding.

Financial planning

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Infrastructure

Listed infrastructure: finding a port in a storm of rising prices

Given the current environment it’s easy to wonder if there are any safe ports in the investment storm. Investments in infrastructure assets show their worth in such times.

Financial planning

Power of attorney: six things you need to know

Whether you are appointing an attorney or have been appointed as an attorney, the full extent of this legal framework should be understood as more people will need to act in this capacity in future.

Interest rates

Rising interest rates and the impact on banks

One of the major questions confronting investors is the portfolio weighting towards Australian banks in an environment of rising rates. Do the recent price falls represent value or are too many bad debts coming?

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.