During the pandemic lockdowns of last year, listed infrastructure went through a significant price reset due to the direct impact on travel, trade and energy markets, driving relative valuations to their cheapest levels in over a decade.
At the end of June, global listed infrastructure traded at a 0.1x cash flow multiple discount to global equities, compared with a 1.3x pre-pandemic premium.
However, Ben Morton, head of global infrastructure at Cohen & Steers has explained that innovation in data transmission and renewable energy, a reopening economy and historic policy support have the potential to offer “equity-like returns” in a post-pandemic strike, with less volatility and attractive downside capture.
“In the US, a bipartisan infrastructure proposal should amplify an already attractive investment opportunity to the extent the policies support railways, power and water infrastructure,” said Morton.
With that, the Biden administration is attempting to streamline the approval process for offshore wind and set offshore wind targets.
This extends to the rest of the world too, countries in Europe and Asia have been launching initiatives focused on renewables, telecom and transportation infrastructure.
Growth in transport
Approximately $30 trillion in global fiscal and monetary stimulus, combined with accelerating vaccine distribution, has put 2021 on course to hit a 50-year high.
This, Morton noted was particularly prevalent in the US where a high savings rate and re-opening of the economy look set converge, ushering in stronger growth – conditions which historically have been favourable for infrastructure businesses.
That said, it’s in transport where this is keenly felt.
Marine ports have seen a large upswing in activity since the Covid-19 vaccines were announced as pent-up demand for industrial goods is fuelling a surge in cargo volumes.
Freight and shipping have also benefitted as the movement of consumer goods has accelerated.
“We expect the broader onshoring trend to provide the potential for a continued tailwind,” he added.
Talking about inflation
Morgan explained that the market’s inflation expectations over the long-run underestimate the potential impact of $30 trillion in global fiscal and monetary stimulus and more inflation-tolerant central bank policies.
He added that listed infrastructure can offer investment characteristics that may help diversify portfolios for the current environment and could even offer equity-like returns.
“This is largely a result of infrastructure business models focused on owning and operating essential assets that generate relatively predictable cash flows, often in regulated industries or markets with high barriers to entry,”
Additionally, infrastructure assets receive contractual adjustments to user fees that provide either fixed annual increases approximating inflation, or variable increases linked to consumer or producer price changes.
“If inflation continues to rise, we expect economically sensitive subsectors, such as transportation and midstream, to perform well,” said Morgan.
“Subsectors that have pricing mechanisms that formally adjust for inflation, such as cell towers and utilities, should also demonstrate cash-flow resilience through the cycle.”
Ride the renewables roll-out
Decarbonisation movements have gained momentum as wind and solar energy can now compete with fossil-based resources without the need for hefty subsidies.
Morgan believes these investments, along with grid modernisation efforts, have the potential to drive significant growth opportunities for US electric utilities and renewable energy developers.
“They will need to upgrade the electric grid to integrate renewables,” he added. “Which could drive a very long runway of low-risk growth for the electric utility sector.
“Forward-thinking midstream energy companies are also increasingly incorporating renewables projects to boost their long-term growth profiles.”
Data and the digital boom
Morgan’s final point centred around data centres and cell tower companies which are benefitting from strong secular growth trends.
By 2026, global mobile data usage is estimated to quadruple, with over half of all traffic likely to be carried by 5G networks.
Rapid growth in data usage in the late-4G environment and the urgent demands of the approaching 5G era will require massive investments to expand communications infrastructure capacity over the next decade,” Morgan noted.
“This stands to directly benefit the cell tower industry. In addition, the spike in wireless and wired data traffic has the potential to drive sustained demand for data centres.”
Interestingly, the US in unique in that the majority of cell towers are owned by independent operators, which benefit from the ability to lease out space on those towers to multiple tenants.
“An independent tower company that can accommodate multiple tenants can typically generate higher margins on those assets than wireless carriers that still own and are the sole user of their towers.”
He finished: “Europe and many other parts of the world still operate largely with carrier-owned towers, but offer potential value creation through transitions and consolidation, as mobile network operators are re-evaluating the ownership structure of their tower assets.”