Part of this increased investment will be made by the existing asset owners; and so the listed infrastructure sector, where the majority of privately owned infrastructure assets reside today, will play an important role in providing this investment, and create good opportunities for investors as markets recover.
For advisers and their clients, when considering potential infrastructure investments, we believe that it is important to focus on companies which offer the strongest combination of inflation linkage and low cash flow volatility, and with a high level of corporate governance and management alignment.
Since the start of the recent market downturn, those infrastructure sectors that are traditionally seen as defensive have, by and large, lived up to their reputation, in particular regulated utilities.
Within this sector, water companies generally have the least sensitivity to economic demand and have stood up well, although the regulatory construct is important when evaluating any impact on earnings.
Interest rate sensitivity should also have been important. North American utilities are generally more interest-rate sensitive than other countries, as the allowed return on equity is less directly linked to bond yields. It was therefore surprising to us that initially during the market weakness, the US regulated utilities were materially weaker than regulated utilities in other countries – at a time when bond yields were falling rapidly, which should have benefitted the US utilities.
One sector that has been significantly impacted by the pandemic is transport.
At this time we see some very cheap valuations in the airport and toll road sectors. This is clearly due to the uncertainty that COVID-19 is having on the traffic for these assets, however we are very confident that when COVID-19 passes these assets will return to being extremely strategic and valuable assets.
The risk to these companies is in the short term, and so the size and terms of the debt in these companies are critical. We are very cautious about those assets that have high levels of gearing or debt covenants that could be breached, as the uncertainty that this creates is too great.
Fortunately there are companies that own transportation infrastructure assets that have low levels of debt and yet have still experienced sharp share price falls, and these are the companies that we are interested in.
We do also expect that, within the airport sector, the extent of the challenges is so significant that there will be longer term impacts – such as a reduction in seat capacity by airlines (as some airlines go out of business), and a change in behaviour of consumers as the acceptance of technology alternatives to business travel increases. Ultimately, however, we are confident that airports will remain critical infrastructure and that air travel growth will return.
In contrast, there is greater uncertainty on the long-term impact of the current oil price war on the North American pipeline sector.
The North American energy sector is less critical to an economic recovery, and so energy producers are unlikely to receive the same level of government support as airlines. The fiscal stimulus being applied might be viewed as being better directed at the renewable sector than fossil fuels, and so may hasten the long-term switch to cleaner energy. These risks may not manifest, however we view the outlook as more uncertain and so are incrementally cautious that some energy pipeline companies could become value traps.
Overall, we believe that investors can benefit from the essential service nature and strong strategic positions of infrastructure assets. In addition, they can access inflation protection and more stable income compared to certain other asset classes such as global equities. This will be increasingly important in the months, and perhaps years, ahead, as global markets recover from the COVID-19-induced downturn and investors seek to rebuild their portfolios and retirement savings.
Andrew Maple-Brown is the managing director of Maple-Brown Abbott Global Listed Infrastructure, a business which he and his partners started with Maple-Brown Abbott in 2012.
