Inflation-linked revenues continue to benefit infrastructure as inflation, tight monetary policies and slowing growth persists
Against a backdrop of still high inflation and slowing global economic growth, listed infrastructure is still poised to offer more liquidity and flexibility than unlisted infrastructure assets, says ClearBridge Investments, a global listed infrastructure equities manager.
“The listed infrastructure market generally provides much more depth in regulated utilities and user-pays assets, offering high-quality core infrastructure assets that are more liquid. Listed infrastructure investors also have more flexibility and can optimise their portfolios in terms of sectors, regions and market cap spectrums,” notes Shane Hurst, portfolio manager, ClearBridge Investments.
“Infrastructure portfolio composition can also be optimised for other investor preferences, such as choice of underlying asset risk exposure, sensitivity to short-term price volatility and opportunistic use of market mispricing and arbitrage,” he adds.
In the context of falling but still high inflation, tight monetary policies and slowing growth, infrastructure benefits from having resilient, inflation-linked revenues.
Hurst says “Due to the essential nature of infrastructure assets, demand is relatively stable, providing lower volatility than traditional equities and resilience of infrastructure revenue during various business cycles.
“Even at times of economic weakness, consumers continue to use water, electricity and gas, drive cars on toll roads and use other essential infrastructure services. Many infrastructure companies have regulation or contracts linked to inflation. As a result, infrastructure companies’ financial performances benefit from inflation with a lag of a few months to a few years.
Longer term, infrastructure should see a number of tailwinds, such as decarbonisation.
Hurst adds “The Inflation Reduction Act (IRA) and other global policy support will be industry transformative. A major takeaway from the global policy support for an energy transition is that there is no reason to build anything other than renewables from now on due to subsidies available and that greater opportunities now exist within our universe as coal-exposed utility companies accelerate their net zero plans.”
He says “Supply chains are shortening and changing trade routes and adjustments to supply chains to bring production closer to home, either through reshoring or near-shoring, are driving demand for new transport infrastructure as well as power infrastructure. The IRA is also bringing new green technology and other industries from abroad to the U.S., to benefit from the tax credits available, driving support for or growth of infrastructure businesses.
“In addition, 5G continues to be a tailwind for infrastructure as significant capex is required to improve and “densify” cellular networks as we move into the Internet of things (IoT) era, driving significant investments in wireless tower businesses, generally undertaken under long-term inflation-linked contracts,” Hurst says.
The ClearBridge RARE Infrastructure Income Fund is one of the few infrastructure strategies in the market with a sustainable income focus.
Hurst notes “This fund is a truly global portfolio with country exposure spread out across developed and emerging markets (most peers are heavily focused in the U.S.). This is a result of the breadth and depth of the investment team which allows them to source for global opportunities that are often times not well covered by others.”
The fund invests in a diverse range of global listed infrastructure securities across a number of infrastructure sub-sectors and geographic regions.
“We focus on user-pays assets (toll roads, railways, airports) and regulated assets (utilities, electricity, renewables) with long-term contracts; these essential services provide revenues and earnings that are resilient through up and down markets. Their revenue streams should be supported by either regulations or long-term concession contracts, which offer good predictability on their cash flow and dividends. This helps the fund meet its income target while providing attractive upside/downside capture versus more volatile global equities, and thereby offering an attractive asymmetric return profile,” says Hurst.
