Listed infrastructure should be on course to bounce back, having underperformed global equities last year, thanks to the expected end to the interest rate hiking cycle, according to Michelle Butler, real assets portfolio specialist at Cohen & Steers.
Last year, the MSCI ACWI Infrastructure index eked out a return of just 4.78% compared with a 24.42% return for the MSCI World index as the former suffered due to the absence of any technology stocks in the index, as well as higher interest rates.
Given its defensive qualities, listed infrastructure typically does well during periods when growth is decelerating, as was the case in 2022 when it returned -4.15% compared with a -17.73% for the broader MSCI World index.
However, during periods when growth surprises on the upside, it fares less well, as was the case last year, while higher interest rates also weigh on the sector as investors switch their focus to fixed income.
With the US Federal Reserve now forecasting at least three quarter-point interest rate cuts later this year, the expectation is that interest rates have now peaked, which tends to be an environment in which listed infrastructure fares well.
“Interestingly, infrastructure tends to perform much better when you come to the end of a rate hiking cycle and so we believe when we look forward, there are supportive tailwinds,” Butler (pictured) told FSA.
“We believe we’ve come to the end of this rate hiking cycle. We’ve seen some stability in prices in the fourth quarter of last year and even saw some rebound as rates came down a bit.”
Equally, Butler also points to attractive entry points that are currently on offer for listed infrastructure as another supportive factor, with valuations versus equities their most attractive since the global financial crisis.
“The asset class is trading at about a 7% discount versus its average. It typically trades at a premium, on average 11%, to global equities. The reason for the premium is because there is value seen in the defensiveness of these assets, but it’s one of the most attractive periods going back 10 or 11 years,” she said.
Sector calls
Despite listed infrastructure’s underperformance versus global equities last year, there was a dispersion in terms of returns.
Transportation such as airports and toll roads, for example, performed particularly well last year as passenger volumes bounced back to pre-pandemic levels, while the mobile tower sector struggled more as telecom operators rolled out 5G at a slower pace than previously expected.
Notwithstanding some of last year’s difficulties, Butler is particularly keen on towers due to the secular tailwind of data and data intensity.
“At one point it was 3G, 4G, 5G, and then there’ll be a 6G, 7G. It’s the continued demand across the globe for data. That benefits tower companies, and also valuations are looking fairly attractive today,” she said.
Butler also has a favourable view towards midstream energy, which has undergone a major shift in the last few years insofar as most of the operators have been working hard to reduce their leverage after the difficulties of previous years.
“It’s a sector that really worked hard to right the ship in the last several years. They have focused on improving their balance sheets,” she said.
“They’re essentially swimming in free cash flow today. They have options, so they can do share buybacks and pay dividends.”
Regarding decarbonisation, which is one of the key megatrends affecting the sector today, Butler said that the firm’s exposure is mostly through utilities, rather than the pure-play renewables, which tend to be smaller in market capitalisation.
“Where we get the most renewable exposure, it will be within utilities, especially electric utilities. So aside from the pure play renewable companies that are a bit smaller in market capitalisation, there are opportunities in the electric utilities — and it’s a very broad-based sub-sector,” she said.
“Virtually every utility has been shifting in the past decade to divest from or reduce coal usage, while still employing natural gas as a key energy source in power generation. But they are also investing in renewables such as wind and solar, which is a secular tailwind.”
