As the world emerges from COVID-19, infrastructure offers investors many opportunities. Below are three observations about the current market conditions.
1. The valuation gap is closing
The past 18 months have been particularly challenging for global listed infrastructure, as 2020 was only the second time in the past 15 years that the asset class underperformed both global equities and bonds over a calendar year. We believe that a lot of risks, such as rising interest rates, have now been priced in. There is now a compelling valuation gap, although we don’t expect it to last.
Our view is that the asset class is well positioned to provide investors with income and steady earnings growth for many years to come.
Chart 1: Price/Earnings for Global Infrastructure
Source: Bloomberg, First Sentier Investors, May 2021
Chart 2: Value Range by Sector
Source: First Sentier Investors, May 2021
2. There’s no need to fear rising inflation
There’s no doubt that low interest rates have been a tailwind for income producing assets like infrastructure. Now expectations have started to shift towards higher interest rates, given the generous stimulus measures and strong economic recovery. It’s understandable that investors may see that as a headwind, but in our view, it’s important to look at what’s really driving that interest rate increase.
If it’s being driven by higher inflation, we think infrastructure assets are well positioned. Most concession agreements are long-term contracts that allow owners to pass inflation through to the end customer. In fact, we estimate that more than 70 per cent of our investable universe has the ability to pass through inflation.
But even in sectors where we don’t necessarily have that explicit link – and freight rail is a good example – factors like high barriers to entry give companies good pricing power.
3. There is a decade-by-decade path to Net Zero Emissions
The first decade will be more of what we are already seeing in developed countries: the decarbonisation of the power generation sector. That includes replacing old, inefficient coal plants with renewable energy, and innovations in battery technology that will make renewables competitive with the gas system.
The second decade is about the electrification of transport, which is the largest emitter of carbon in today’s world. Infrastructure providers can achieve this through investment in transmission and distribution assets, pulling energy to centrally located hubs that charging stations can connect to. That will require further investment in renewables, and in transmission and distribution technology.
The 2040s will be focused on tackling those hard-to-abate sectors through step changes in technology. Essentially, we will leave the hardest challenges until last. That includes reducing the cost curves of things like green hydrogen and sustainable aviation fuels. Almost all the strategies to reach net zero require infrastructure investment, so as investors, we have an important role to play in addressing climate change.
Quin Smith, Key Account Manager
Phone: +61 455 095 505
Email: Quin.Smith@firstsentier.com
Important Information
This publication is provided by First Sentier Investors (Australia) IM Ltd (‘FSI’) in good faith and is designed as a summary to accompany the Product Disclosure Statement for the First Sentier Global Listed Infrastructure Fund (‘the Fund’). The Product Disclosure Statement for the Fund is available from FSI, or Implemented Investment Solutions Limited (‘IIS’ or ‘the Issuer’) and on https://disclose-register.companiesoffice.govt.nz/ or https://iisolutions.co.nz/fund-hosting/documents-and-reporting-2/.
The information contained in this publication is not an offer of units in the Fund or a proposal or an invitation to make an offer to sell, or a recommendation to subscribe for or purchase any units in the Fund. If you are making an investment directly then you will be required to complete the application form, which can be obtained from IIS.
The information and any opinions in this publication are based on sources that FSI believes are reliable and accurate. FSI, its directors, officers and employees make no representations or warranties of any kind as to the accuracy or completeness of the information contained in this publication and disclaim liability for any loss, damage, cost or expense that may arise from any reliance on the information or any opinions, conclusions or recommendations contained in it, whether that loss or damage is caused by any fault or negligence on the part of FSI, or otherwise, except for any statutory liability which cannot be excluded.
All opinions reflect FSI’s judgment on the date of this publication and are subject to change without notice. This disclaimer extends to IIS, and any entity that may distribute this publication. The information in this publication is not intended to be financial advice for the purposes of the Financial Markets Conduct Act 2013 (FMC Act), as amended by the Financial Services Legislation Amendment Act 2019 (FSLAA).
In particular, in preparing this publication, FSI did not take into account the investment objectives, financial situation and particular needs of any particular person. Professional investment advice from an appropriately qualified adviser should be taken before making any investment.
Past performance is not necessarily indicative of future performance, unit prices may go down as well as up and an investor in the Fund may not recover the full amount the capital that they invest.
No part of this publication may be reproduced without the permission of FSI or IIS. IIS is the issuer and manager of the Fund. FSI is the investment manager of the Fund.
Copyright © First Sentier Investors
All rights reserved.