Listed Infrastructure Equity - The Impact of Rising Rates

Listed Infrastructure

 

Fidante analyses the impact of rising interest rates on listed infrastructure equity

 

  • In a rising-rate environment, investing in an asset perceived by many investors as a “bond proxy” may seem as smart as buying a chicken farm on the verge of a bird flu epidemic. So it is understandable that investors may be becoming wary of allocating to infrastructure equity as rates start to head up in the US and the UK. However – as is so often the case with investments – things are more complicated than that.
  • In broad terms, infrastructure equity is seen as a bond proxy because the total return from these investments comes, to a large extent, through dividend payments, and the capital-intensive nature of companies in some infrastructure sectors makes them sensitive to changes in interest rates, as rising rates increase debt servicing charges. Rising rates also push up discount rates, and so depress valuations by reducing the value of the expected future returns.
  • However, the negative effects of rising rates are offset by the fact that cash flows generated by infrastructure companies are often linked to inflation. Infrastructure assets tend to have a strong element of inflation protection, especially in the case of regulated utilities, for which regulation or the contracts entered into will often link charges to the customer to inflation. In this regard, it is real rather than nominal rates that investors need to pay closest attention to: inflation rising faster than rates – an environment of rising nominal rates but falling real rates – should be positive for many infrastructure assets. Thus, we will review the current environment for rates and inflation later on in this note.
  • We’ll be restricting our analysis to listed infrastructure equity, looking in more detail at some of the risks associated with these investments, including the risk of rising interest rates. Unlisted infrastructure equity and infrastructure debt have different characteristics and are not considered here.

 

To view the full report click here.

 

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