Equity markets embraced companies embodying the ‘new economy’ during the pandemic year of 2020 – businesses such as Peloton, Netflix and Zoom. Far less excitement was triggered by the ‘essential economy’ – such as water, gas and electric utilities as CBRE Clarion’s Jeremy Anagnos, portfolio manager of Nordea’s Global Listed Infrastructure strategy, explains.
However, it is important not to forget infrastructure companies form the backbone of every economy. Indeed, government policies are accelerating investments in infrastructure – in particular, the upgrading of ageing infrastructure assets and the clean energy transition.
A recent example is the big shift occurring in the US under the new administration led by Joe Biden. During the presidential campaign, candidate Biden unveiled a $2trn infrastructure plan – concentrating on roads, rails and bridges, developing zero-emission transport and electric car infrastructure.
The ‘blue wave’ election result will likely usher in huge infrastructure spend, tax credits and subsidies for clean energy – while new appointments are strengthening the EPA, the energy regulator. These new measures will accelerate the ongoing phase out of coal plants and increase the amount of renewable development over the next decade.
This is also not just a US story, with additional strong commitments in Europe, China and Japan. To meet the 2050 net-zero carbon goal, forecasts suggest $740bn of global capital expenditure is required annually – up from prior estimates of $400bn. These capital-intensive investments can be financed at historically low funding costs.
Strong sector dynamics
Listed infrastructure spreads across a variety of sectors – such as communications, midstream energy, utilities and transportation. These companies are supported by recent tailwinds and long-term dynamics.
Existing infrastructure assets already require ongoing investment – to enhance safety, reliability and efficiency. This consistent organic growth is reinforced by the recent initiatives targeting infrastructure upgrades. For example, the clean energy transition should invigorate ageing network assets, as it requires significant investment in the network and electric grid. Annual investments are forecasted to increase by 50% from 2020-2030, which will translate into attractive earnings and dividends.
For many infrastructure companies, decarbonisation has become a major theme, particularly for utilities. Many still own old and costly coal-fired power plants, which have the potential to be replaced by increasingly cheaper renewables. Innovation is also driving investment opportunities in battery storage, smart meters, and network efficiency.
More generally, the continued rollout of Covid-19 vaccines should support the outlook for the more traffic or volume-exposed businesses – such as toll roads, passenger rail companies and midstream companies. We also remain positive on the data growth theme, which remains secularly and structurally supported by increased digitalisation and the internet of things.
Valuation and ESG drivers
After a year where infrastructure performance disconnected from fundamentals, we see four primary drivers of the asset class.
Firstly, global listed infrastructure trailed global equities by 20% last year, with the relative EBITDA multiple de-rating to levels last seen in the aftermath of the global financial crisis. The global listed infrastructure space now displays a 10% discount to global equities, versus a long-term 10% premium.
Secondly, while corporate bond yields have been compressing in recent years, listed infrastructure dividend yields have remained firm. The relative yield spread between global infrastructure and credit has now reached an all-time high.
Thirdly, infrastructure assets in the listed markets are trading at 20% plus discounts to private market values. This gap is supported by a ‘wall’ of private market capital, only waiting to be invested, which distorts asset valuations. The M&A potential for listed assets also should not be ignored, as the listed space increasingly appeals to institutional investors – particularly given the discounted valuations and the scarce availability of similar assets in private markets.
Finally, infrastructure companies generate positive social, environmental and economic impacts – such as contributing to greenhouse gas emissions reduction, the revitalisation of disenfranchised areas and improving access to services. Listed infrastructure underpins many of the 17 UN Sustainable Development Goals and ESG fund flows are increasingly seeking investments in themes key to the asset class – such as decarbonisation and clean water.