Looking at the performance of global infrastructure securities against that of global bonds and equities over between August 2008 and June 2016, across a number of macroeconomic factors, the firm said: “Relative to broader equities, and on an annualized basis global infrastructure outperformed by more than 5% annually when either interest rates were falling, credit spreads were increasing, or inflation was above average.”
There was very little in the way of correlation between movements in global sovereign bond yields and absolute returns of global listed infrastructure, the firm said, but noted that when looked at in relative to equity performance a strong relationship could be seen.
“Global infrastructure outperforms global equities by 9.7 percentage points annually during periods of falling sovereign yields and underperforms by 6.4 percentage points annually when nominal interest rates are rising,” the firm said, adding that the analysis found that all sectors of infrastructure, barring ports, outperformed global equities when interest rates were falling.
When looked at in terms of changes in real interest rates, the impact of inflation expectations was revealed. Looking specifically at U.S. based infrastructure securities as the firm said, as those represent the largest number and broadest diversity of sectors, it demonstrated a clear difference between the performance of infrastructure in periods of rising yields and when yields are falling.
“The difference between nominal and real interest rate changes can mostly be explained by inflation expectations,” Deutsche Bank explained: “holding nominal yields constant, as inflation expectations rise, real yields will fall. The fact that infrastructure securities benefit from falling real yields, whereas equity securities show no correlation, would imply that infrastructure securities should provide a hedge against rising inflation expectations,” the firm said.
As the chart shows, from December 2008 to March 2013, the rate moved from 9 basis points to 251, the firm said, adding: “during that time period, U.S. infrastructure outperformed U.S. equities by a total of 54%. The rate then moved down to 143 basis points and U.S. equities outperformed U.S. infrastructure by a total of 23%.”
