COVID-19: Impacts on Infrastructure
AMP Capital believes infrastructure, as an asset class, offers defensive positioning that makes it an attractive inclusion in a portfolio in an environment such as the one we are currently facing.
That’s not to say that individual infrastructure assets won’t be exposed to significant risk from the COVID-19 outbreak, however, in our view, a number of defining characteristics of the sector – consistent returns, lower volatility, and reliable long-term income yields – mean that a well-diversified infrastructure portfolio is well-placed to weather the downturn, relative to many other asset classes.
As infrastructure assets commonly provide essential services, demand is less elastic than in many other sectors, and utilisation is often less exposed to adverse economic conditions. Generally, returns for these assets are consequentially more consistent and subject to less volatility than for comparable assets outside the sector, as illustrated in the following chart.
Figure 1: Return and volatility of selected asset classes, 10 years to 30 June 2019.1
Infrastructure revenues are often underpinned by regulation or long-term contracts, which provide a high level of visibility and certainty relating to future cashflows from the asset.
In assessing risk within an infrastructure portfolio in the current environment, it is important to understand the extent to which these characteristics apply to the assets in question.
Three categories become apparent:
Public-Private Partnerships (PPPs)
PPPs are commonly used by governments to deliver infrastructure projects such as roads, hospitals, schools and public transport systems.
These are, for the most part, “availability” assets, where revenues are paid on the condition that the asset remains available for use, regardless of actual patronage, and the counterparty to these contracts is often a highly creditworthy government body. The concessions awarded on these assets often last decades, and they are highly resistant to economic downturns.
Whilst utilities may not enjoy the same level of contractual protection as PPPs, in many cases they are still insulated to a significant degree from economic contraction by the nature of their business. They typically deliver essential services such as water and electricity, for which demand persists even in downturns. In addition, pricing is often regulated and unresponsive to short-term economic fluctuations.
Other economic infrastructure
In our view, assets with volume-based revenue carry the most obvious potential for negative exposure to the current economic climate. This risk will vary from asset to asset, depending on their business model and proximity to the areas most affected by the virus and measures designed to contain it.
Beyond the characteristics of each asset in a portfolio, attention should be paid to the action taken by asset managers to protect value and mitigate risks associated with the outbreak. At AMP Capital in the Global Infrastructure Equity team, we are taking proactive concrete steps to manage risk from COVID-19 in our assets, including:
- Ensuring a safe working environment for employees & customers
- Considering financial impacts, and preparing for any material impacts to revenues
- Implementing contingency measures contained within Pandemic and Business Continuity Plans
- Considering the potential impacts on supply chain and inventory and mitigating risks around supply chain disruption, including alternative sourcing.
Other key considerations include diversification, which at times of extreme uncertainty is crucial not only across a portfolio but within the asset classes contained in that portfolio. For example, a pure transport infrastructure portfolio which is concentrated in patronage or volume assets is, in our view, likely a much riskier play than a portfolio that is well diversified across a broad range of categories of infrastructure.
Finally, the business fundamentals of each asset need to be taken into consideration, including the extent to which it is leveraged, the resilience of its cash flows, and its ability to meet requirements such as debt covenants, refinancing and working capital throughout the period of the downturn.
Subscribe below to Market Watch to receive my latest articlesJohn Julian, Investment Director
1 Source: AMP Capital. Different asset classes will offer different investment features, including differing levels of liquidity.
Unlisted Infrastructure represented by the MSCI Australian Unlisted Infrastructure Index. Listed Infrastructure represented by the Dow Jones Brookfield Global Infrastructure Net Accumulation Index. Global Treasury Bonds represented by Bloomberg Barclays Global Treasury GDP Index. Global Equities represented by the MSCI World Net Accumulation Index. Global REITS represented by the FTSE EPRA NAREIT Developed Rental Net. Australian Equities represented by the S&P/ASX 200 (franking credit adjusted). 50/50 Unlisted/Listed Infrastructure Portfolio represented by a 50% weighting to the MSCI Australian Unlisted Infrastructure Index, and a 50% weighting to the Dow Jones Brookfield Global Infrastructure Net Accumulation Index. All data in AUD. All data is for the period 31 March 2009 to 30 June 2019, except for the FTSE EPRA NAREIT Developed Rental Net index where data is for the period 31 May 2009 to 30 June 2019 (as the data series only began in May 2009). Past performance is not a reliable indicator of future performance.
While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. The information in this document contains statements that are the author’s beliefs and/or opinions. Any beliefs and/or opinions shared are as at the date shown and are subject to change without notice. This document is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.