Charles Savage, Principal and Portfolio Manager for community infrastructure assets, shares his thoughts on 2020 and its impact on life beyond this year.
How has 2020 changed your outlook?
I think it has become very clear that the global economy is not immune to natural disruptors. We understood the negative effects of events such as wars and a financial crisis, and we have seen the mixed effects when new technology disrupts older technology (smartphone, Uber, social media) and changes the way our society functions.
However, over the last century we’ve not really experienced a natural medical event coming out of the blue like this and disrupting our world so quickly. It goes to show just how fragile the social and economic fabric of our civilization really is, that something like this can come along and “stop the world” for nine months (and counting) and cause such havoc within markets. There will need to be a lot of thinking about how we can manage this type of pandemic in the future, because in some respects you could say that we haven’t really learned much since the Spanish flu 100 years ago.
What factors have determined the way in which infrastructure assets have been affected by the pandemic?
To answer this question, we need to consider two broad types of infrastructure assets: those which are patronage based and those which are availability based. The former draw their revenue according to the extent to which they’re being used, while the latter maintain their revenue streams so long as they are available for use.
Many patronage-based assets have been hit hard by this pandemic, with airports the classic example. A lot of these assets are still not running at anywhere near full capacity, while others, such as toll roads, were severely affected at the height of the pandemic in Australia but have returned to some semblance of normality.
On the other hand, social infrastructure public-private partnerships, such as schools and hospitals, have continued to perform very strongly, since investors receive contracted revenue as long as they are available for use and appropriately maintained.
Overall, despite the initial shock the impacts to revenues may not be as enduring as they were during previous major crises such as the GFC, and particularly if vaccines come to fruition in early to mid-2021 even the most-affected patronage-based assts have a clear path back to normality.
How successful have portfolio managers been in mitigating the effects on their operations?
As countries go into lockdown there’s not a lot that portfolio managers can do to contain the flow-on effects for patronage assets, apart from managing operating expenses. Unfortunately, the scope for that is a little limited in most cases, given that many of these assets have ongoing costs that are independent of the level of patronage.
The other operational consideration is simply keeping the doors open and essential staff healthy and on-site, both of which are of obvious importance to both availability and patronage-based assets. Hygiene has become critical, and cleaning teams are now at the front line of operations. In the spirit of never letting a good crisis go to waste, this focus should be considered beyond the end of the pandemic. For example, we could possibly see personal temperature scanning become as routine as security scanning at airports, and the ongoing use of medical-grade filters in air-conditioning systems could reduce transmission risks.
For a civilisation that put people on the moon 50 years ago and is developing incredibly intricate technology in other fields, including medical science, we’ve been incredibly disrupted by this simple virus. Over the coming years there are clearly improvements available in infrastructure operations and management to make sure we’re better prepared in the future, as history does tend to repeat itself.
How will we look back on 2020?
I think we’ll look back with considerable relief, as for many of us, this is likely to be the biggest disruption in economic and social activity in our lifetime. I’ve lived through the Global Financial Crisis and a number of recessions and stock market crashes, but none has had anywhere near the universal global impact of this pandemic. And it has had nothing to do with technology, nothing to do with wars, and nothing to do with economic cycles per se. But I think we’ll be relieved, both in the knowledge that the worst is likely to be over and in the hope that we’ll be better prepared for any future events of the kind.
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