Economic data is starting to show the true scale of the damage COVID-19 has done to the local and global economy, and we know the hit is significant. It’s important to remember that amid the panic and the downside, there is strength and opportunity – and infrastructure is no exception to those dynamics.
About a year ago, federal treasurer Josh Frydenberg projected Australia’s budget to be in surplus for 2019/20. In retrospect, it was a buoyant time. Though GDP growth had been sluggish in Australia, the nation was enjoying its almost 30-year run of uninterrupted growth, and the national accounts were declared a hope of getting out of the red for the first time in about 10 years. Today, those projections have been flipped on their head. Now, Australia’s federal budget deficit is expected to peak at approximately $200 billion next financial year, which is about 10% of GDP1. These are the highest levels since World War II.
The impact of this black swan event on investment markets has been significant, and infrastructure is included in that mix. In a note from investment director John Julian back in mid-March, AMP Capital acknowledged that, in light of the downside risks on the horizon, the need for asset managers to take proactive steps to protect value and mitigate risks associated with COVID-19. At the time, he also called out the factors that can make some categories of infrastructure relatively resilient, including that as infrastructure assets commonly provide essential services, demand can be less elastic than in many other sectors, and utilisation is often less exposed to adverse economic conditions2.
Beyond the defensive attributes of infrastructure discussed at the time, we have also since seen infrastructure assets AMP Capital manages on behalf of clients transform into frontline responders. For example, Optus Stadium in Western Australia has transformed from a home of live sporting events to being heavily utilised by the state’s police force as a crisis management centre. The stadium is one of four centres being utilised by the state government to coordinate and command the state of emergency, and is at the heart of the state’s efforts to track cases and ensure quarantine compliance. AMP Capital is a partner in its ownership, and facilitated the use of the site for these purposes by lodging the alternate use as an ‘intervening event’ under the contract for the concession.
Further, while investment markets are nowhere near out of the woods yet, it’s important to remember that what we’re currently experiencing is a temporary disruption, and that markets have recovered from wars, collapses and pandemics past. That in mind, keeping an eye on long-term investment prospects is a focus for AMP Capital’s investment teams, in a bid to ensure clients are well positioned during the inevitable recovery. In this context, we believe that a tailwind for infrastructure could be emerging as part of governments’ clawing back GDP growth.
For example, as suggested by treasurer Frydenberg3, productivity-enhancing reforms are a path to paying back government debt, inclusive of workforce training, education, cutting red tape and infrastructure. Australia has used infrastructure to stimulate its economy before. In 2009, following the Global Financial Crisis, the federal government created an infrastructure component to its stimulus package to support the economy through the aftershocks of the market crash. Spending on schools, social housing, road and rail were included in this package, with schools forming the largest component4. Across the government spectrum, departments are looking for shovel-ready projects including investments in infrastructure.
We’ve heard many times throughout this crisis that what we’re facing is unprecedented, and that is certainly the case. However, there are some knowns of this situation, and of them is that this too, shall pass. As such, AMP Capital continues to keep an eye on long-term opportunities with the fundamentals to survive this short-term disruption, and the head room to grow in its wake.
Subscribe to Institutional Edition below to receive my latest articlesKatarina Taurian, Content Editor and Senior Writer
2 See Figure 1: https://www.ampcapital.com/au/en/insights-hub/articles/2020/march/mixed-implications-for-infrastructure-as-covid19-outbreak-continues
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