After a year of strong relative performance for global listed infrastructure in 2022, infrastructure underperformed in 2023 in a stock market powered by a handful of tech names. Stronger-than-expected global growth and falling inflation dampened the appeal of the more defensive qualities of infrastructure, which investors are discounting in the current macroeconomic environment, in our view.
We believe that there continues to be a lot of macro uncertainty and that capital valuations in many cases have not yet reflected this. That said, we believe it is an exciting time for investors to allocate to global listed infrastructure based on three factors that could benefit the asset class over time.
Attractive performance characteristics in uncertain macro backgrounds
Infrastructure has a long history of resilience and relative good performance in periods of equity market volatility – in particular, outperforming almost all market declines of more than 5% since 2007.
The asset class has similarly delivered strong relative returns during periods of higher-than-expected inflation compared to stocks and bonds. Furthermore, infrastructure has historically outperformed the broader global capital market in three of the four phases of the business cycle: the late cycle characterized by overheating economic conditions, recessions and early cycle recoveries. This is partly due to inelastic demand and the fundamentally public nature of infrastructure businesses, making cash flows predictable and less volatile in all economic environments.
Very attractive reviews
Based on the weak performance of infrastructure in 2023, the asset class is seeing its most attractive relative valuations since the global financial crisis. The impact of higher rates is being felt heavily in infrastructure valuations today, while global equities have yet to reflect broader macro uncertainty. While we believe the selloff in infrastructure stocks was overdone, it led to unique investment opportunities at discounted valuations, especially for active managers who are able to take advantage of these types of market dislocations.
Diversification with access to the main investment themes
Global listed infrastructure can be an attractive allocation as it has little overlap with broad equity exposures, accounting for just 4% of the MSCI World Index. The asset class provides access to sub-sectors and investment themes that are typically under-represented in broad capital market allocations, such as transportation or cell towers, while also providing geographic diversification. The liquidity of a listed allocation can also be used to quickly capitalize on dislocations that occur in the market. As such, a listed infrastructure portfolio can provide exposure to a wide range of sectors, geographies and market capitalisations.
Infrastructure is also well positioned to benefit from the move to clean energy. Increased policy and economic support for these initiatives, such as the Inflation Reduction Act, has provided substantial headwinds for related businesses in the infrastructure universe, such as utilities and clean solar and wind power producers.
However, we believe that traditional energy should continue to play a role in meeting energy demand alongside alternative energy for the foreseeable future. As such, the “Energy Surge,” as we've dubbed it, is resulting in compelling investment opportunities in subsectors such as midstream energy, where companies play a key role in processing, transporting, and storing energy commodities like natural gas. .
There are also other important investment themes and opportunities emerging in the infrastructure universe, including but not limited to extensive infrastructure modernization after decades of historical underinvestment; the digital transformation of economies supported by new topics such as artificial intelligence, driving exponential growth in data demand, benefiting data centers and cell towers; and increasing supply chain support from transport sectors such as freight rail and seaports.
Appealing a long-term allocation
We believe that challenges in the new economic paradigm – including persistently higher inflation and higher nominal interest rates – may prevent the rapid acceleration of economic activity typically seen in the early recovery phase of the cycle. As we head towards 2024, we believe global growth will remain well below trend. Interest rates are likely to remain high, but certainly much closer to the peak than the bottom, and inflation, although falling, is likely to remain above trend with the possibility of periods of higher inflation reoccurring. Against this backdrop, we believe that listed infrastructure is an attractive portfolio allocation that can benefit investors over the long term.
Ben Morton is head of global infrastructure for Cohen & Steers.