When people think about infrastructure, they can sometimes be under the misconception that the asset class can be a considered as a single, cohesive sector.
But in reality, it is composed of many different industries and sub-sectors that are affected by different economic events in different ways.
Never has this been more evident than during the pandemic.
Sectors like utilities and communications are generally largely immune from the economic cycle, while sectors like energy and transport are usually considered to be quite sensitive.
When assets are hit with a shocking economic event, like a pandemic that can cause GDP contractions of more than 10 per cent in some countries, it is natural to see differing reactions within the different sectors.
We believe responses by sectors was even more complex than that, as the different sectors demonstrated different performances over time as the twists and turns of the pandemic played out.
The early pandemic period had a particularly severe economic impact as governments reacted with lockdowns, border closures and restrictions on business operations. During this period, we believe the sectors that went well were the ones who were more defensive like telecommunication and utilities, while energy and transport were hit.
However, this remarkably short phase was rapidly followed by news of vaccines and a swift change in market rhetoric from lockdown to re-opening.
During this second phase of the pandemic, in our opinion the sectors that were most penalised early fared better. Energy and transport sectors have performed relatively better over the last six to nine months1.
This re-opening euphoria has given way to a new phase where the market became fixated on the question of whether economies would be re-opening fully or whether the world will experience a series of further lockdowns.
One thing that is different about this new phase is that the cycles of pessimism and optimism are getting shorter.
From March 2020, we had eight months of lockdown worry followed by four months of reopening excitement in Europe. Now in 2021, we are seeing shorter market cycles occurring in Europe and the US depending on the spread of new variants of COVID-19.
As investors, we need to try to stay immune from this noise. This is especially true for infrastructure. Infrastructure investors typically invest in assets with a long-term view to hold over decades.
The recovery will be different for different assets
Regardless of which sector is the short-term flavour of the month, eventually the world will overcome and recover from this pandemic.
One interesting aspect of infrastructure is that the same event can have different effects on different assets – for example what may be considered negative for an airport (lockdowns and international border closures) might be positive for a telecommunications asset (more data usage).
Whether the solution is the development of widespread immunity, or because the vaccine will be rolled out to the global population, we believe it should not matter to investors taking a long-term view of their assets.
Sometime in the next two, three or four years, the world will return to normal.
The trap is being lured into these reopening versus lockdown trades.
In fact, as contrarian investors at AMP Capital, we aim to take advantage of the market’s swings to scale positions upwards or downwards in key sectors.
As the Delta variant of the virus swept the world in recent weeks, AMP Capital has tilted its exposure to the transportation sector because some stocks were down 15 to 20 per cent in a month2.
Where we believe there may be a dislocation between share price and value, we always try to take advantage through our investment choices. When the market acts in such a binary way this can present opportunity for investors who are watching for it.
Listed airport companies are a perfect example.
Airport shares have bounced around in recent months, with some major airports gaining or losing as much as 20%3 in bouts of short-term market volatility based on perceptions of whether the world economy is in a re-opening or lockdown phase.
While it is of course important to analyse and understand short-term cashflows – especially whether some of these business will have the cash to survive the next few years of reduced capacity – the broad approach should be an understanding that we will be back to a normal environment, eventually.
Airports will be around long after the virus has gone.
Learning from our past experience
The second change from 2020 is that business in general is becoming more capable of handling government lockdowns, which means lockdowns may have a lesser economic impact than they did last year.
When lockdowns hit across the planet last year, none of us were prepared. Briefly, business stopped. However, as lockdowns are used again in 2021 against the virus, there is a sense that the world can keep on trading.
In our opinion businesses are now more robust, supply chains have adapted and working from home policies are well-refined.
This means economic output is not stalling as much as it did when lockdowns first hit in 2020. At the same time, governments are now well-practised in putting safety measures in place for businesses that are genuinely unable to cope with lockdown, such as hospitality. We believe this means incomes are not falling as much as they did in the first round of lockdowns.
As a result, we believe it is a good time for investors to be considering investing in the sustained long-term trends that should still be with us after the pandemic passes.
First among these trends is the ongoing digitalisation of the planet.
Growth in the internet and ecommerce sectors and the deployment of fast 5G mobile phone networks are creating a structural trend which we believe will be with us for decades. The telecommunications sector is the sector benefiting most from this.
Another long-term trend is the battle against climate change and the opportunities for the utility sector. The transition away from carbon-emitting energy is a theme that was already prominent pre-pandemic but will play an even greater role in future. The climate change related flood in Europe this summer might embolden the world to act4.
As investors, our role is to identify and act on these long-term trends, but also to exploit the dislocation in markets that happens from time to time between an asset’s share price and its potential value.
1. Dow Jones Brookfield Global Infrastructure Index
2. Dow Jones Brookfield Global Infrastructure Index
This article has been prepared to provide general information and does not constitute 'financial advice' for the purposes of the Financial Advisors Act 2008 (Act). An individual investor should, before making any investment decisions, consider the information available in the relevant Product Disclosure Statement and seek professional advice. While every care has been taken in the preparation of this document, AMP Capital Investors (New Zealand) Limited and the AMP Group (together, 'AMP') make no guarantee that the information supplied is accurate, complete or timely and do not make any warranties or representations in respect of results gained from its use. The information is not intended to infer that current or past returns are indicative of future returns. The views expressed are those of the author and do not necessarily reflect those of AMP. These views are subject to change depending on market conditions and other factors.