Why Now is a Good Time to Consider Investing in Infrastructure
Whitehelm Capital
Global equities are setting new all-time highs while the world economy is on its knees. This divergence has many investors concerned about market valuations and taking a cautious approach to their equity exposure. The tailwinds to rising share markets are well-known, with massive amounts of monetary and fiscal stimulus, and to a lesser extent increased savings rates and retail investor participation.
Delving into the detail, the rebound in equity markets has been predominately driven by a narrow segment of the market – US tech and other high beta sectors – which have significantly outperformed European and Asian markets. The US listed mega-tech stocks, the ‘FAANG’ stocks now make up about 12% of the MSCI World Index and the US market now makes up over 60% of this index.
Seeking downside protection
Through February and March 2020, as the Covid pandemic took hold, global equity markets fell 13% in AUD terms. The Whitehelm Listed Core Infrastructure strategy provided 20% downside protection, declining by 10% net of fees. Despite outperforming the FTSE Core Infrastructure index, the drawdown was more marked than what has been experienced in other negative periods. The fact that this is a health crisis as well as an economic one meant that lockdowns hit transport stocks especially hard. Listed infrastructure has also lagged global equity indices as markets rebounded as shown in the following chart.
Listed infrastructure has lagged broader global markets for several reasons:
- The nature of this crisis has meant that transport infrastructure has been particularly hard-hit. For example, airport revenues fell to nearly zero and remain around 70 per cent lower than pre-pandemic levels.
- Toll roads and passenger rail have also been heavily affected.
- Immediate fiscal stimulus was rightly focused on employers and the consumer, while infrastructure will benefit from longer-term stimulus programs.
Apart from the transportation sector, the earnings from infrastructure assets have held up well. Utilities have reported earnings in the range of +5% to -10%, and all of the utilities in the Whitehelm Listed Core Infrastructure strategy (65% of the portfolio) have maintained or increased their dividends.
The MSCI World Index aggregate weighted earnings have fallen 29% over the past year. In contrast, the aggregate earnings of the FTSE Developed Core Infrastructure Index have fallen only 12%, and the aggregate weighted earnings of the Whitehelm Listed Core Infrastructure strategy holdings have fallen less than 10%.
Despite earnings having fallen in most sectors (outside of tech and some healthcare and consumer stocks), global share markets are close to all-time highs, meaning that global equities have become much more expensive. The outperformance of the MSCI World over listed infrastructure is driven more from Price/Earnings expansion than from than fundamentals.
The dynamics which have led to the stunning return on equities over the past nine months are also shifting. As vaccine rollouts begin and economic activity picks up, some of the short-term stimulus that has been so supportive is starting to be wound back.
The charts below show the rising valuation of global equities and the gap with listed core infrastructure:
Outlook
The valuation gap between global equities and listed infrastructure is now at extreme levels relative to historical averages. This potentially presents an opportunity for investors who are considering investing in listed infrastructure.
- The worst of the lockdown impacts have been absorbed by the transport infrastructure stocks.
- Core utility companies are generating consistent earnings.
- Core utility companies will benefit from longer-term stimulus dynamics.
Core infrastructure can provide strong risk-adjusted returns as well as an attractive relative income stream. For investors cautious about stretched valuations for global equities, listed infrastructure appears relatively cheap in comparison.
The Whitehelm Listed Core Infrastructure strategy has a historical beta of just 0.56 to global equities, and a solid dividend yield of 3.4%1. Since inception nearly five years ago, it has a downside risk measure (volatility of negative monthly returns) 20% lower than the MSCI World Index.
The Whitehelm Listed Core Infrastructure strategy since inception2 has outperformed the benchmark of OECD CPI+5%p.a. and outperformed the major listed infrastructure indices.
Find out more
For more information, please contact your local Fidante Partners Business Development Manager or call the Fidante Partners Adviser Services Team on 1800 195 853.