Giuseppe Corona, our Head of Global Listed Infrastructure, shares his thoughts on a significant year for listed infrastructure.
How have the effects of COVID-19 been felt in the listed infrastructure space?
2020 has delivered a paradigm shift for investors, who in the future will need to more seriously provide for the possibility of an exogenous shock, which brings economies to a halt and prevents society from fulfilling basic needs - such as healthcare, education, transportation and even human interaction.
Within listed infrastructure, the impacts have varied. If you think about the four macro sectors that make up the listed investment infrastructure universe, transport and energy infrastructure have been adversely affected, utilities less so and communications infrastructure on the whole looks to be a beneficiary of the disruption.
Of course, these generalisations don’t always hold for every type of asset within a sector. Despite broader strife in the energy infrastructure sector, oil storage assets did extremely well out of the contango that developed in oil futures early in the pandemic, where at one point the spot price dipped below zero. But that’s a unique situation very much tied to the global lack of oil storage capacity – total global storage only equates to about 15 days’ worth of daily consumption- and expectations of future shortfalls in supply due to the effect of recent low prices on exploration and extraction projects.1
Are the benefits to communications infrastructure you mention due primarily to work-from-home, or are other factors like e-commerce playing a role as well?
It’s not quite as simple as a one-to-one correlation between demand for data and revenue for communications infrastructure. Instead, what the pandemic has done is to accelerate these secular trends such as work-from-home and e-commerce, and of course video conferencing as well, and the market starts to anticipate a future environment in which demand for data will be exponentially higher than previously expected. And that drives higher valuations for infrastructure that will meet that need.
How is the extended period of low interest rates across the major economies affecting infrastructure?
As long-duration and highly-leveraged assets, infrastructure tends to perform strongly in a low rate environment (all else being equal), and valuations are very sensitive to changes in interest rate expectations. The underlying characteristics of the asset class, in which long-term total return is supported by an above average dividend yield, is particularly attractive in a low-rate environment. So record-low rates and commitments from central banks to hold them there are very supportive for infrastructure.
This has all seemed pretty unprecedented, but with a bit of hindsight are there patterns in 2020 that we’ve seen before?
You really have to go back to the 1919 Spanish flu to find a direct equivalent, so I can think we can safely say it has no parallel in our lifetimes. And I hope it is a parenthesis, because we all realise that there are better ways of living than the way we’ve lived our lives in 2020, let alone the staggering amount of lost lives around the world.
So given the scale of the disruption, are you surprised at the resilience shown by markets?
In some markets, perhaps. With regards to infrastructure, the contraction of 10 to 15% that we’ve seen broadly aligns with what I would have expected given the loss of revenues in the sector. The damage has been serious in some areas but in the end, we’re talking about one, maybe two or three years of cash flows in the long life of some of these assets. So at an asset class level we’re about where we should be, but of course investors have a tendency to overshoot and I think there are some assets that have been oversold, and that’s where a good active manager looks for dislocations.
1. IHS Markit
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