By Ben Morton, head of Global Infrastructure and a senior portfolio manager at Cohen & Steers
Low relative valuations, inflation linkages and strong fundamentals are positioning listed infrastructure to potentially deliver attractive long-term returns.
Slow start in 2021 presents a potential opportunity
Coming into 2021, we published our view that listed infrastructure was likely positioned for a strong vintage year. Transportation and energy infrastructure sectors that were hard hit by the pandemic stood to benefit from vaccine distribution and economic reopening, while other sectors were well positioned for structural trends in the shift to clean energy and increasing data usage.
Today, airports, passenger rails and toll roads are still wrestling with concerns about the spread of coronavirus variants. And utilities have been essentially flat for the second year in a row, left behind in a strong technology-led bull market. Year to date through 31 July, listed infrastructure has returned a healthy 6.7% but has lagged the 13.1% return for global stocks. We believe this represents an opportunity based on improving activity in most infrastructure sectors, coinciding with increasing investor focus on the asset class with the passage of a bipartisan infrastructure bill in the US Senate on 10 August 2021 (Exhibit 1).
Reopening is well underway
The pandemic is not in the rear-view mirror yet, and the Delta variant’s higher potency is causing a wave of new cases globally. However, regions with high vaccination rates have largely broken the link between new cases and severe illness, allowing more regions to lift restrictions. Re-openings are unleashing pent-up demand at a time when savings rates are at record levels, as households around the world have built over $5 trillion in excess savings thanks to strong fiscal support.
Most global economic indicators continue to beat expectations, while high household savings and accelerating corporate investment have the potential to drive job creation and productivity, contributing to our above-consensus outlook for global growth. Many central banks are targeting maximum employment rather than typical “full” employment. And infrastructure spending programs globally are supporting economic growth while driving investor interest in infrastructure allocations. Passage of the Senate bill shows the US may finally be getting serious about infrastructure. The bill now heads to the House of Representatives for debate, but we see positive implications for listed infrastructure broadly.
Capital flows supporting infrastructure valuations
Investor interest in both listed and private infrastructure is the highest we have ever observed, driven by growing concerns of inflation and the asset class’s history of strong, defensive performance. According to Preqin, private infrastructure funds held a record $290 billion in uninvested capital, or “dry powder,” as of June 2021. Following a lull in deal activity in 2020, infrastructure transactions have accelerated this year, ranging from specific asset sales to acquisitions of entire companies. Buyouts of listed companies have occurred at significant premiums to their recent share-price trading range.
Despite improving fundamentals and strong investment demand, listed infrastructure is trading at a valuation multiple below its historical range relative to global equities, as measured by EV/EBITDA (Exhibit 2).
Infrastructure offers inflation linkages
The recent spike in inflation has been largely the result of supply constraints and year-over-year comparisons to 2020’s low price levels. Infrastructure assets such as freight rails and marine ports are a playing a crucial role in helping to ease these supply chain issues, benefiting from the need to transport goods. Over the longer term, we believe infrastructure has the potential to defend against increased inflation risk stemming from unprecedented fiscal and monetary stimulus enacted to spur the economic recovery.
Infrastructure returns have historically demonstrated a positive relationship with unexpected inflation, contrasting with neutral to negative relative performance for stocks and bonds (Exhibit 3). This elevated inflation sensitivity is the result of pricing mechanisms across different revenue models, as well as the potential for increased throughput in certain subsectors in a strengthening economy.
