Macroeconomic outlook benign for Infrastructure… but beware technological disruption


Disruptors could appear within the infrastructure sector.

RARE Infrastructure, the Sydney based investment manager specialising in global listed infrastructure believes 2018 should be a relatively benign year for the sector.

“We are expecting a stable operating environment but recognise that any deviation from expectations could cause an outsized movement in asset prices, said Nick Langley, Co- CEO, Co-CIO Rare Infrastructure.

“While there may be volatility, RARE does not expect any major corrections, as there is still significant cash on the sidelines waiting to ‘buy the dips’.

“In short, we expect continued growth in usage/patronage for infrastructure companies but expect pressure on achieved prices, impacting revenues.

“As long as we continue to see strong underlying economic growth we will continue to see an increase in revenue and cash flow growth, which is supportive of earnings and dividend growth.

“While RARE is fully invested, in 2017 we increased the defensive positioning of strategies.

“We are seeking a balance between the more defensive regulated utility companies with higher growth infrastructure companies, such as rail companies, toll roads and airports.

“We predict that three key themes will drive the infrastructure market in 2018.

First is asset based growth- companies investing in their underlying assets to generate future returns, rather than buying or building new assets.

Most of the companies RARE invests in are achieving between 7% and 10% return on equity which in turn is being invested into the company’s existing assets.

Second is price elasticity of demand. We believe that, as companies need to be careful not to increase prices beyond the consumer’s willingness to pay. For instance Toll roads that increase rates beyond a certain level can quickly find revenues impacted by motorists taking alternative routes.

“Third and arguably the theme with the greatest potential to change markets is technological disruption. Investors are starting to consider, and be wary of, the impacts of changes in technology on the way we utilise our infrastructure, and there may be some winners and losers out of that.

“Some examples of disruptors within the infrastructure sector include: the falling cost of battery energy storage, greater penetration of renewable power generation, increased inter-connection of electricity networks, and the greater prevalence of electric vehicles, “ said Nick Langley.

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