AMP Capital shows global listed infrastructure is not just a bond proxy as sovereign yields rise around the world
Sovereign yields around the world are rising off the back of rising inflation expectations and political events such as the election of President Trump in the US but rising interest rates don’t correlate to lower returns for infrastructure stocks, says AMP Capital.
According to AMP Capital’s latest whitepaper, Not Just a Bond Proxy, this rising yields environment causes a market overreaction, which results in short-term underperformance of global listed infrastructure stocks compared to global equities. However, it is an overreaction that belies the asset class’s true characteristics and the recovery that has followed every rate rise in the business cycle since the Global Financial Crisis (GFC).
The new research shows the average performance of listed infrastructure during periods of rising yields is 0.9 per cent, compared to 10.3 per cent for global equities. Listed infrastructure, however, recovered after each of these periods of rising yields, outperforming global equities by around 10 per cent during the following 12 months.
AMP Capital Head of Global Listed Infrastructure Giuseppe Corona said: “Each meaningful increase in sovereign yields since the GFC, including the Taper tantrum in 2013 and the Bund tantrum in 2015, saw global listed infrastructure underperform global equities on a short-term basis before recovering all of that relative underperformance in the 12 months following.
“What this shows is a market overreaction to a rising yields environment. A strong correlation between the performance of global listed infrastructure and its cashflow growth shows investors should focus on the underlying assets and their ability to generate visible and growing cashflows, and not be spooked by the dramatics of short-term market moves.
“Furthermore, the impact of rising yields should also be taken in the context of listed infrastructure’s sector diversification. Sectors such as utilities, communication, transportation and oil and gas storage transportation are not affected by changes to interest rates in the same way so investors can mitigate risk arising from macro factors such as interest rates.”
One such example is communications infrastructure companies, which are typically very sensitive to interest rate changes on account of their long duration and above-average financial leverage. With mobile data traffic growing 4,000 times during the past ten years and projected to grow at 53 per cent compound annual growth rate between 2015 and 2020, with speeds of 5G and higher in the future, exposure to this secular growth thematic partially offsets the impact of rising rates.
Similarly, in oil and gas, rising world population growth is expected to reach 9.1 billion by 2040, mainly driven by India and some African countries such as Nigeria, driving an increase in global energy consumption. Increasing living standards will push billions of people to drive more vehicles and consume more electricity to power their home appliances, which continues to support new investments in pipelines and storage assets. The International Energy Agency expects US natural gas production to increase at an annual rate of 4 per cent for the remainder of the decade.
AMP Capital’s paper emphasises the importance of differentiating between the short-term volatility of equity prices and the long-term stability of cash flows.
“Investors should always focus on the underlying assets and their ability to generate visible and growing cashflows because of the strong correlation between the long-term performance of the asset class and its cashflow growth. Having said that, volatility that comes with short-term increases in interest rates can present a buying opportunity for savvy investors to capitalise on the dislocation between value and price,” Mr Corona said.