By Ben Morton, head of Global Infrastructure at Cohen & Steers
Listed infrastructure experienced a significant price reset during pandemic shutdowns due to the direct impact on travel, trade and energy markets in 2020, driving relative valuations to their cheapest levels in over a decade. At the end of June, global listed infrastructure traded at a 0.1x cash flow multiple discount to global equities, compared with a 1.3x pre-pandemic premium.
However, innovation in data transmission and renewable energy, a reopening economy and historic policy support are combining to create potentially attractive infrastructure opportunities for investors looking to build more resilient portfolios – with the potential for equity-like returns, significantly less volatility and attractive downside capture.
Infrastructure initiatives abound
In the US, a bipartisan infrastructure proposal should amplify an already attractive investment opportunity to the extent the policies support railways, power and water infrastructure. Furthermore, to the extent a sizeable plan serves to stimulate the economy, most subsectors of the listed infrastructure universe could benefit. Separately, the administration is taking concrete steps to streamline the approval process for offshore wind and set offshore wind targets.
While a lot of attention today is being given to the US fiscal stimulus effort as it relates to infrastructure, the reality is many countries and regions of the world have been focused on infrastructure development for years. Countries in Europe and Asia most recently have been launching initiatives focused on renewables, telecom and transportation infrastructure, and thinking more proactively about using private capital to fund infrastructure investments.
Record growth reinvigorates transport
Roughly $30 trillion in global fiscal and monetary stimulus, combined with accelerating vaccine distribution, has put global growth in 2021 on course to potentially hit a 50-year high. Particularly in the US, business restrictions have been easing, and consumers – who have generally been saving during the pandemic – appear ready to spend. These trends point to the potential for stronger growth and higher long-term inflation – conditions which have historically been favourable for infrastructure businesses.
A continued economic recovery would likely have the largest impact on transportation infrastructure. Marine ports have seen a tremendous upswing in activity since COVID-19 vaccines were announced, as pent-up demand for industrial goods is fuelling a surge in cargo volumes. The recovery of the goods-based economy – including e-commerce – has likewise led to a resurgence of freight rail volumes that has exceeded the broader economic recovery. This can also be seen in the shift in mix of freight being moved. Whereas shipments of energy commodities and related goods are still below 2019 levels, the movement of consumer goods has accelerated, benefiting from increasing online orders and a broader trend of inventory restocking. We expect the broader onshoring trend to provide the potential for a continued tailwind.
Meanwhile, increasing toll road traffic has demonstrated the potential for a rapid recovery as vaccines become more widely available and as travel resumes, particularly in Europe.