We discuss the outlook for infrastructure amid rising inflation and increased demand for income.
Key points
- We believe that current inflationary pressures, constrained equity and fixed-income asset yields and an increase in demand for income by ageing demographics have all created a compelling case for investment in infrastructure.
- Despite slowing global travel affecting many transport-focused businesses, the rest of the infrastructure sector remains relatively unscathed.
- While all infrastructure assets share the characteristic of possessing long-term, contractually inflation-protected cash flows, the drivers of different areas within infrastructure are varied.
Why do investors look to infrastructure? We believe they seek three things: defensive business models, inflation protection and income. The last two years tested and proved both the resilience of these business models and the defensive nature of non-transport businesses. While slowing global travel affected many transport organisations such as airports and toll roads, the balance of the infrastructure sector remains relatively unscathed despite current Covid headwinds. Additionally, current inflationary pressures, constrained equity and fixed-income asset yields and an increase in demand for income by aging demographics have all created a compelling case for investment in infrastructure.
Inflation
Investors can seek out those companies with mechanisms that help pass through inflation. Long a hallmark of the infrastructure asset class, these inflation call options have always been understood but underappreciated in deflationary periods. This low-inflation environment has drastically reversed course over the last six months, positioning infrastructure as one of the most natural asset classes to contractually protect from the erosive pressures of rising costs.
Income
With equity and bond markets hovering near all-time highs, their respective yields remain near all-time lows. Additionally, demographics continue to raise the demand for income despite an increasing dearth of supply. Historically, investors have invested in the infrastructure asset class because of its above-market-average yields. Most infrastructure businesses are toll collectors of pre-existing assets and generally pay out most of their cash to shareholders in the form of dividends. The delivery of income is in high demand and directly aligned with client demographics.
Infrastructure
Infrastructure is often viewed as a single asset class, when in fact the term ‘infrastructure’ encompasses a diverse set of assets. With exposure to themes such as broadband access via 5G (telecommunications infrastructure), energy transition (utilities and energy infrastructure) and ageing demographics (health-care real estate), the asset class is quite diverse. While all infrastructure assets share the characteristic of possessing long-term, contractually inflation-protected cash flows, the drivers of different areas within infrastructure are varied.
Looking ahead
After many years of unsuccessful infrastructure spending legislation in the US, we finally saw a breakthrough in November of last year. The $1.2 trillion infrastructure plan includes approximately $550 billion in new spend targeting traditional infrastructure areas such as roads, bridges, rail, the power grid, broadband and water. When paired with the €1.0 trillion European Green Deal, there is a secular step up in infrastructure spend that remains supportive of the asset class. Additionally, supply-chain issues are not expected to affect infrastructure. These generational assets are, for the most part, already established and collecting rents. These businesses are generally domestically oriented and thus insulated from current supply-chain concerns.
In summary, we believe that investors seeking steady, consistent and sustainable equity dividend yield return should consider the three ‘I’s by maintaining exposure to infrastructure when seeking income and inflation protection.
Authors
James A Lydotes
Head of equity income and deputy chief investment officer, equity
This is a financial promotion. These opinions should not be construed as investment or other advice and are subject to change. This material is for information purposes only. This material is for professional investors only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those securities, countries or sectors. Please note that holdings and positioning are subject to change without notice. This article was written by a member of the NIMNA investment team. ‘Newton’ and/or ‘Newton Investment Management’ is a corporate brand which refers to the following group of affiliated companies: Newton Investment Management Limited (NIM) and Newton Investment Management North America LLC (NIMNA). NIMNA was established in 2021 and is comprised of the equity and multi-asset teams from an affiliate, Mellon Investments Corporation.
This material is for Australian wholesale clients only and is not intended for distribution to, nor should it be relied upon by, retail clients. This information has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person. Before making an investment decision you should carefully consider, with or without the assistance of a financial adviser, whether such an investment strategy is appropriate in light of your particular investment needs, objectives and financial circumstances.
Newton Investment Management Limited is exempt from the requirement to hold an Australian financial services licence in respect of the financial services it provides to wholesale clients in Australia and is authorised and regulated by the Financial Conduct Authority of the UK under UK laws, which differ from Australian laws.
Newton Investment Management Limited (Newton) is authorised and regulated in the UK by the Financial Conduct Authority (FCA), 12 Endeavour Square, London, E20 1JN. Newton is providing financial services to wholesale clients in Australia in reliance on ASIC Corporations (Repeal and Transitional) Instrument 2016/396, a copy of which is on the website of the Australian Securities and Investments Commission, www.asic.gov.au. The instrument exempts entities that are authorised and regulated in the UK by the FCA, such as Newton, from the need to hold an Australian financial services license under the Corporations Act 2001 for certain financial services provided to Australian wholesale clients on certain conditions. Financial services provided by Newton are regulated by the FCA under the laws and regulatory requirements of the United Kingdom, which are different to the laws applying in Australia.
