Seeing opportunities in both cyclical and secular growth sectors
With economies reopening, fundamentals have strengthened for midstream energy and most transportation infrastructure sectors. Meanwhile, digital infrastructure demand remains strong, while the recent underperformance of more defensive electric utility businesses has resulted in more attractive valuations. We believe a wide range of factors could spur the asset class’s performance in the next 12 months.
Freight rails
- Average US freight carloads through six months in 2021 are on par with 2019 volumes due to rebounding economic activity.
- Themes such as the onshoring of manufacturing and inventory restocking should continue to drive shipments in the next several quarters, based on our estimates.
- Improving operational efficiency, higher capital returns and the potential for further industry consolidation are additional tailwinds.
Marine ports
- Marine ports had strong returns in the first half of 2021, benefiting from surging economic activity and increasing international trade.
- Business inventories-to-sales ratios in the US and Europe remain well below their recent historical averages, suggesting port volumes will remain elevated as the restocking cycle continues in the months ahead.
- Container volumes historically have grown at 3x the rate of global GDP.
Midstream energy
- Lack of new liquefaction facilities could keep global price differentials for liquefied natural gas wide, potentially boosting exporters’ margins and driving new demand for export capacity.
- Strong energy demand and tight energy supplies have led to improving volumes and increasing free cash flow yield estimates.
- The costly regulatory and permitting process for new pipelines underscores the critical importance of legacy energy infrastructure assets—even in a slowly decarbonizing world.
- Industry consolidation offers companies a means to drive synergies and growth.
Airports
- Airport passenger volumes have begun to rebound but are still a long way from normal due to cross border travel restrictions and virus concerns.
- We expect the sector’s recovery to be uneven, with domestic and leisure travel returning faster than international and business flights.
- Fundamentals also vary by region, with travel policies tailored to country-specific virus and vaccination trends.
Towers and data centres
- Towers are benefiting from rising carrier spending amid increasing network spending by global mobile service providers.
- Tower leasing in 2022 is expected to be the strongest in years, as network densification will require more towers.
- Data centre leasing activity remains robust, with growing data usage fuelling demand from enterprise and hyper-scale tenants.
- Data centres are benefiting from investments in cloud computing, 5G, and AI.
Electric utilities
- Defensive sectors have underperformed in the tech-led rally.
- The transition to decarbonized energy supply could drive above-trend growth in the coming years as companies develop renewable generation and invest in electricity transmission.
- Regulatory/political risks somewhat offset the sector’s visible near-term growth.
- These capital-intensive businesses are sensitive to rising interest rates.
Conclusion
Infrastructure has lagged the broader global equities market this year amid lingering concerns around travel, and as investors have embraced risk at the expense of defensive sectors. We view the return disparity as an opportunity given solid and improving underlying infrastructure fundamentals and secular growth drivers, along with attractive relative valuations and the potential for mounting inflation risk to drive flows into the asset class.
