Amid tumultuous international sharemarket conditions, global infrastructure stocks have proved resilient with the asset class outperforming broader global equities by +18.8% (in Australian-dollar terms) last financial year [1].  

Surging inflation, rising interest rates and Russia’s invasion of Ukraine, among other macro-economic factors, weighed heavily on market sentiment. This saw some investors pivot away from riskier investments, such as growth stocks, to those with established earnings and more defensive attributes.   

In Argo’s view, the inherent characteristics of listed infrastructure companies, including the income streams generated by their assets, have greater appeal in this “risk-off” environment. 

In addition, the spectre of rising and persistent inflation focused attention on the inflation-linked pricing mechanisms offered by many infrastructure assets. These regulated assets, such as utilities, toll roads and pipelines, can potentially offer inflation protection.  

Appetite for infrastructure assets from institutional investors also drive the asset class’s outperformance last financial year, in Argo’s view. Seeking access to the underlying assets of listed infrastructure companies, buyers were prepared to pay premiums to acquire infrastructure companies. 

A local example was Sydney Airport, which was sold at a premium of +50.6% to its market price at the time of the first bid in July 2021. With a growing pool of institutional capital being allocated to infrastructure investment and limited assets available to purchase globally, this trend could potentially continue, in Argo’s opinion.

[Editor’s Note: As with any investment strategy, there are benefits and risks when investing in infrastructure stocks or funds. The valuations of infrastructure stocks can be affected by changes in interest rates and prevailing equity market conditions. Currency risk is another consideration for investors who buy listed companies or funds that own overseas infrastructure assets].

Understanding infrastructure 

Infrastructure assets are the real or “hard” assets vital for economies to function. This diverse group falls into four broad categories: 

• Transportation (toll roads, ports, railways and airports)
• Midstream energy (including pipelines and storage)
• Utilities (including gas, electricity and water)
• Communications (such as wireless communication towers and satellites) 

Key characteristics

While these assets cover a broad range of industries, they share several characteristics: 

High barriers to entry:  Infrastructure assets are costly to build and difficult to replace. This reduces competition and can potentially create monopolistic market positions and pricing power. 

Long-life assets: As infrastructure assets are typically built to last 30 to 50 years or more, they can potentially provide the opportunity for long-term investment income.

Stable and predictable cash flows: The essential service nature of most infrastructure assets means demand is reasonably inelastic [less affected by the state of the economy]. This potentially can generate stable and predictable cash flows, even in economic downturns. That said, the unprecedented decision of governments globally to effectively shut down their economies at the height of the COVID-19 pandemic had a severely negative impact on toll-roads and airports as road and air-traffic volumes evaporated. 

Inflation-linked pricing: Asset regulators generally take inflation into account when setting asset-pricing structures. This means that as inflation rises, asset operators are often permitted to increase user fees, such as road tolls.  

For the listed companies that own and operate infrastructure assets, these common characteristics have the potential to translate into long-term income streams, through varying economic conditions and cycles.   

Listed versus unlisted infrastructure

Listed infrastructure companies own the same kinds of assets as unlisted private infrastructure owners. Listed companies have the added benefits of being exchange-traded stocks, such as transparency and daily pricing. 

Argo believes another important benefit is the highly liquid nature of the listed infrastructure universe, giving active investors the ability to adjust portfolio positions rapidly as opportunities arise and conditions change. This flexibility is generally not afforded by direct infrastructure investments, which typically require a significant and long-duration capital commitment.  

In addition, the small minimum capital required to invest in infrastructure stocks provides investors with an effective way to create a diversified portfolio, in Argo’s opinion.
 

Why look offshore

Although Australia was at the vanguard of the listed infrastructure asset class with the privatisation of numerous government-owned assets over many years, options to invest in listed infrastructure have fallen in recent times. 

This trend has gathered pace over the last 12 months with some ASX-listed infrastructure companies being sold to consortiums of private institutional investors. The most significant of these transactions was the $23.6 billion sale and de-listing of Sydney Airport.

Beyond Australia’s shores, there are hundreds of infrastructure stocks with a large combined market capitalisation. The global asset class is diversified, spanning numerous geographies across emerging and developed markets, and offering access to all types of infrastructure.  

As the global economy moves towards net-zero emissions, there are increasing opportunities overseas to invest in renewable energy utilities, such as wind, solar and hydro power.
 

Chart 1: Australia versus global listed infrastructure companies

Source: Argo 

Risks 

Because many infrastructure assets play an essential economic role, they are typically highly regulated and somewhat susceptible to prevailing political conditions. However, heavily indebted governments worldwide are motivated to work with the private sector to help deliver vital infrastructure services, in Argo’s view.

As infrastructure assets are capital-intensive, this can make them sensitive to interest rate movements, although the potential impacts vary across infrastructure subsectors. Argo’s analysis of historical data shows that the negative effects of rising interest rates on infrastructure assets are generally short-lived. 

Active portfolio management can play a critical role in mitigating infrastructure risks by reducing exposure to geographies and subsectors facing headwinds and deploying capital to other opportunities. This can be achieved due to the liquid nature of the global listed infrastructure universe, which provides flexibility to quickly re-position a portfolio.
 

Outlook

Argo believes that while the current economic uncertainties pose challenges for all asset classes, the inherent features of global listed infrastructure could be more suitable to this environment. 

Longer-term, the outlook for infrastructure is supported by structural tailwinds and trends such as global decarbonisation and digitisation, in Argo’s view.