With expected interest rate cuts in several major economies, professionals say the outlook is reasonably bright for listed infrastructure investments.
Speaking to InvestorDaily, Steven Kempler, co-founder and portfolio manager for Global Listed Infrastructure at Maple-Brown Abbott, said monetary easing “will rarely ever be a headwind for infrastructure”.
“Going into 2025, with the tailwind of rate cuts potentially from central banks around the world, we’re pretty positive around the medium-term outlook for the asset class.”
These assets, he suggested, have largely been flying under the radar against the AI-driven market rally and could now see renewed focus as rates reduce.
“We believe valuations are not full at all, in fact, they’ve really lagged global equities by a pretty wide margin over the last two years, so I think that starting point [of rate cuts] really sets up infrastructure for continued positive returns,” Kempler said.
Looking back at the last 18 months, he pointed out the return differential between global listed infrastructure and global equities stood at more than 30 per cent.
“We don’t think that return differential is justified, given the underlying fundamentals of the infrastructure assets, which should continue to see long-term earnings growth, even through this period,” Kempler said.
Some 40 per cent of this divergence, he said, has been driven by the tech rally and the seven large-cap stocks in the US.
Meanwhile, 50 per cent “has been largely unexplained” and can be attributed, in part, to a higher interest rate environment.
“It’s our view that that return differential will compress over time as valuations of listed infrastructure are generally begun to be more realised by the market,” he said.
In particular, Kempler said, with rate cuts causing yield spread between infrastructure investments and lower-risk assets like term deposits, to widen the upcoming rate cut cycle could increase the attractiveness of infrastructure assets.
“[It] naturally becomes a lot more attractive to a wider investor base than during peak interest rates when investors are, perhaps, a bit more cautious on these types of assets,” he said.
In a recent market note, Shane Hurst, portfolio manager at ClearBridge Investments, also highlighted higher bond yields have weighed on infrastructure stocks of late, whose dividends must compete with bonds for income investor capital.
Hurst explained that infrastructure stocks typically require a lag in passing through higher costs from interest rates to allowed returns (for regulated assets such as utilities) or long-term contracts (for user-pays assets such as toll roads and airports).
“Yet infrastructure has historically outperformed global equities as interest rates have peaked, something to keep in mind as inflation indicators slow and allow major central banks to end their hawkish positioning and move toward easing,” Hurst said.
“Outperformance of infrastructure over several time periods following the last rate hike in a cycle confirms our thesis that we don’t need bond yields to fall for infrastructure to outperform,” he said, adding that greater certainty for rates could be supportive for infrastructure valuations and key thematic drivers.
Heading into a period of interest rate cuts, Sarah Shaw, global portfolio manager and CEO of 4D Infrastructure, also believes the tides could soon turn for infrastructure.
“Sentiment should reverse, allowing the stocks to re-rate to fundamental value – we think this is imminent with US set to start cutting in September and should be a tailwind through the back end of Q4 and into 2025,” she told InvestorDaily.
“It’s interesting to note that in June, the asset class underperformed as economic data was buoyant and suggested rate cuts would be pushed out again. By contrast, in July, when there was a softening in labour markets and rate cuts were back on the table, including talks of emergency cuts, infrastructure outperformed.
“We do believe this is a prime time to add to a fundamentally cheap asset class as equity sentiment should be turning in its favour.”
While the fund manager will be closely monitoring market sensitivity to rate movements, Shaw said a key benefit of infrastructure “is that it can be fundamentally positioned for all points of the cycle”.
This could mean allocating overweight to user-pays assets like toll roads in buoyant economic environments and overweight utilities in more depressed environments, she said.
