The four pillars of infrastructure in the wake of COVID-19
Four segments of the infrastructure industry – communications, utilities, energy and transport – have been impacted by COVID-19 in different ways. Our listed infrastructure team explain how they responded and what they’re bracing for in recovery.
When the pandemic first took off, the communications industry was all but untouched. If anything, many communications businesses actually benefited as the world turned to doing business remotely and stepped up use of digital collaboration tools.
In utilities, the electricity sector suffered a downturn in March and April as economies shut down but came back remarkably quickly in May and June.
Energy was pummelled by the twin effects of a dramatic drop in oil demand and a price war between exporters.
Meanwhile, the transport industry was flattened.
Data from Apple shows requests for directions for walking, driving and public transport collapsed as the virus took hold.
Movements dropped more than 80 per cent in parts of hard-hit Europe and more than 50 per cent in the US1.
Transport is an input to almost all goods and services globally and has always been the bellwether of the global economy, wearing the world’s growth and contraction in its daily volumes.
Giuseppe Corona, AMP Capital’s head of global listed infrastructure, says the recovery in the freight transport sector will be a leading indicator of the global economy’s revival.
We just don’t believe that we are going to live in a world where we work from home all the time, or we are never going to travel ever again. This is a serious pandemic. But eventually, in our view, transport volumes will return to, and surpass, historical levels.”
– Giuseppe Corona, head of global listed infrastructure, AMP Capital
“Clients ask us these questions: will people ever use airports again? Will we go back to work from an office ever again? Will this change the way we do business? Is this the end of the urban lifestyle? With these types of questions, they are saying if we extrapolate the current environment, what’s the value of the investments in the portfolio?
“Our response to that is: we just don’t believe that we are going to live in a world where we work from home all the time, or we are never going to travel ever again. This is a serious pandemic. But eventually, in our view, transport volumes will return to, and surpass, historical levels.”
Corona says his investment team moved quickly to make portfolio changes as the COVID-19 crisis intensified.
“We have gradually increased our exposure to transportation assets because we believe the correction that was caused by COVID-19 represented a good opportunity,” he says.
“Entering 2020 we were relatively underweighted in transport, so we used this correction as an opportunity to increase three sectors – rail in the US, airports in Europe and toll roads both in Europe and elsewhere.
“Being a contrarian and being a value investor, we looked at this opportunity as a good entry point.”
Andy Jones, a London-based portfolio manager and analyst in AMP Capital’s listed infrastructure division, says the two parts of the transportation economy – freight and passenger – have behaved differently than they have in past recessions, opening opportunities for investors.
Normally, passenger and freight transport operate hand in hand. As economies grow, volumes rise. And as economies contract, both freight and passenger transport fall in predictable ways.
Not this time.
“The passenger economy has virtually ceased – people have stopped moving around,” said Jones.
“The summer vacation season in the Northern Hemisphere offered promise of a more rapid rebound in aviation traffic, however, disparate and uncoordinated national measures to control movement of people effectively limited demand, returning aviation to its state of hibernation. The silver lining for airlines and airports, is that the limiting factor for demand is not fear of flying, but temporary measures imposed to suppress infection rates”.
“However, the freight economy has shrunk by far less than we expected.”
“Usually in a recession or an economic contraction, you see international freight volumes shrink much more than passenger volumes. This time round it has been completely the opposite.”
The Apple data shows mobility bottomed in mid to late March in the US and Europe and that by early June, Germany and the US were back to pre-COVID levels, while hard hit European countries, like the UK and Italy, were only a few weeks behind.
Usually in a recession or an economic contraction, you see international freight volumes shrink much more than passenger volumes. This time round it has been completely the opposite.”
However, there was nuance in the data.
According to Apple Mobility Trends in data, in the USA, driving trends exceeded prior baseline levels relatively quickly (by June) but public transport usage still languishes 38% below pre-COVID levels1.
“We’ve seen various data points showing people are much happier to get into a car rather than get on a bus or get on the train,” says Jones.
“And you’d expect that to continue at least until people become comfortable, or until congestion becomes so bad that people are forced back onto public transport.”
Interestingly, some of the more successful countries at containing COVID-19 were showing a slower return to normal mobility. By early June, New Zealand, South Korea and Australia all remained well below the mobility patterns seen before the crisis, with secondary and tertiary mobility restrictions constraining the pace of recovery.
In contrast to passenger movement, freight suffered relatively less during the height of the crisis between March and May.
“As economies have reopened, freight trends have returned close to ‘normal’ levels, but passenger transport remains in the doldrums,” says Jones.
“Where you get the biggest exposure to freight volumes – as a pure freight operation – is railroads in the US,” says Jones. “This is an industry which has been evolving its operating model for much of the last decade, and was able to respond far more nimbly to the revenue shortfalls of Q2 and Q3 – even accelerating some aspects of structural change which may have taken years to execute in a business-as-usual environment.”
While Corona reassures his clients that the recovery is coming, he cautions it will take time and may differ from country to country.
“The severity, the length, the magnitude. It has been quite different. And because of that, the recovery is going to be different.
“It may take one, two, three, four, five years, depending on the answers, depending on the sectors, depending on a vaccine, depending on so many variables. We remain ready to invest where we see markets pricing in a permanent loss of demand that we think is not justified by our understanding of the assets.”
Footnotes:
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Important Notes
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