There are many reasons why infrastructure should be a sound investment option. It has defensive cashflows and inflation protection at a time when global economic growth is weak and inflation high. It is also a natural beneficiary of vast government spending programmes, such as the US Infrastructure Investment and Jobs Act, and the Inflation Reduction Act (IRA).
Operationally, meanwhile, infrastructure companies have continued to perform well.
And yet it has been a grim couple of years for the asset class. In the three years to 31 January, the FTSE Global Core Infrastructure 50/50 index has delivered an annualised return of 4.4%, compared to 8.9% for the MSCI World. This gap has been particularly acute during the past 12 months, when the MSCI World index gained 17.6%, versus a fall of 2% in the infrastructure index. This, says Emily Foshag, manager of the Principal Asset Management Global Listed Infrastructure fund, is where the opportunity may lie in the year ahead.
Operationally, infrastructure assets have been doing what they’ve always done. They provide essential services, operating as regulated, contracted monopolies, such as utilities, transportation, infrastructure, airports, ports, toll roads and energy infrastructure. This may include renewable infrastructure and oil and gas pipelines, and more recently, communications infrastructure such as cell phone towers and satellites. They are cashflow-generative, with inflation-protected revenue streams.
The problem has largely been one of sentiment and circumstance. Foshag says that while infrastructure usually does well during a recession versus global equities, the 2020 recession was an anomaly.
See also: #InspireInclusion: How can asset managers maintain momentum?
“The nature of the health crisis had a disproportionate impact for infrastructure companies. It was difficult to be an airport or a toll road business during Covid.”
Energy infrastructure was also hit by a weaker oil price. Since then, there have been other problems. “In 2021, the market was very focused on post-vaccine recovery. Cyclical stocks were hot, so infrastructure trailed again,” she says.
In 2022, infrastructure fared better, but from the start of 2023 the sector has struggled against rising interest rates. Flows have come out of the sector, as investors have moved back into fixed income and cash.
However, it means the stocks have got cheaper. Foshag says: “We’ve been banging the table that the relative valuations of global infrastructure versus global equity look attractive. If you look at enterprise value to Ebitda multiples, historically infrastructure has traded at a slight premium. That premium is the lowest it’s been since the global financial crisis.”
Listed infrastructure also trades at a significant discount to unlisted infrastructure. Foshag says the difference between the two sectors has widened to around 30%. “There’s a strong valuation argument for infrastructure today.”
See also: Schroders launches energy transition infrastructure LTAF
Equally, many of the factors supporting infrastructure assets are still in place, she says. For example, Principal is expecting annual investment in the energy transition to increase to around $2trn (£1.6trn) in the second half of this decade, up from $1.4trn from 2021 to 2025. Western economies need the productivity boost that global infrastructure development provides.
A recent report from McKinsey found the world needs to invest about 3.8% of GDP from 2016 to 2030, or an average of $3.3trn a year in economic infrastructure just to support expected rates of growth.
Read the rest of this article in the March issue of Portfolio Adviser magazine
