Adventures in infrastructure
Despite general market falls, one area has been surprisingly resilient: infrastructure.
Zenith Investment Partners reports that the Global Listed Infrastructure (GLI) sector has continued to deliver “attractive” return attributes for 12 months ending 31 March 2020.
Dan Cave, Senior Investment Analyst at Zenith, says that the GLI sector is not immune to listed market volatility, typically provides a greater level of downside protection compared to other industrial equities.
“Obviously, absolute returns for the period have been impacted, with the median manager across our rated GLI funds delivering -9.25% (after fees). However, they outperformed Global equities, which produced a return of -11.11% for the same period,” said Cave.
That’s one reason Cave and Zenith think infrastructure could provide a strong diversification vehicle for investors.
Andrew Greenup, deputy head of GLI at First Sentier Investors, says that infrastructure sectors are generally mispriced, creating a buying opportunity.
“Mobile towers are seeing unprecedented demand for network capacity as internet usage soars,” he says. “Electric, gas and water utilities continue to provide essential services to their communities through this crisis. While usage is down, earnings are driven by regulated return on capital investments, making these companies the most recession-proof businesses in the asset class.”
Greenup, like Cave, says that GLI seems to be less generally susceptible to global volatility.
There are, however, exceptions. Airports, toll roads, and passenger railways have seen demand plummet. Even energy providers, like electricity and natural gas, have seen reductions.
“Oil and gas pipelines and storage are under pressure from both demand and supply problems in global energy markets, leading to lower prices, lower customer creditworthiness and higher risk of standard assets.
“Freight railways are the most economically sensitive sector of global listed infrastructure asset class. Not surprisingly, it is going to experience large volume declines in the next quarter as the global economy grinds to a halt.”
Both First Sentier’s Greenup and Zenith’s Cave agree that infrastructure opportunities will come out largely unscathed. “Most of these companies have robust balance sheets to get through this 2020 revenue hole,” said Greenup. “While transport infrastructure is facing an ugly lockdown period, these long-dated assets with robust business models will survive this once-in-a lifetime event.
“There will also be buying opportunities. Toll roads look to be aggressively oversold given the one-off nature of COVID-19 lockdowns, so we have been cautiously adding to positions in Vinci, Eiffage and Transurban,” he says.
Cave says the future looks strong. “Despite so much uncertainty surrounding COVID-19’s impact on global markets and the real economy, Zenith believes GLI still has a strong role to play in an investor’s portfolio. This is due to the sector’s stable earnings profile, especially in a recessionary environment. While not all segments have performed in a defensive manner in the recent market drawdown, we believe an allocation to GLI provides diversification benefits to investors through the cycle due to its inherent defensiveness relative to equities.”
Is GLI mispriced?
There is often a discrepancy in the market between the perceived value of an asset and the price that it trades at. The benefit of GLI comes from its physical nature. “The gap to intrinsic value has increased significantly compared to late 2019,” says Greenup. “In fact, we have not witnessed the GLI asset class trading at this large a discount to our estimate of intrinsic value since the GFC.
“Listed infrastructure firms are trading at very low earnings multiples despite interest rates being low to negative around the world.
“I do get worried about governments and central banks printing money, but I sleep well at night knowing they can’t just make more real assets like our Zurich’s airport, FL electric grid, like the expressway connecting Shanghai to Nanjing or Birmingham’s water pipes,” says Greenup.
The physical nature of the asset class, and its essential nature, will make it a valuable proposition coming out of the COVID-19 crisis. “We believe the GLI asset class is well suited to this type of macro environment, with its essential service nature, structural rather than cyclical growth characteristics and a benign interest rate outlook,” concluded Greenup.