The market turbulence triggered by the coronavirus crisis also left its mark on listed infrastructure companies. Although the asset class held up better overall than the broad equity market, as expected, there were some significant differences in the individual segments. The mobility restrictions led to price slumps for operators of airports and toll roads, and companies in the oil and gas sector corrected in the wake of the drop in oil prices. In contrast, telecommunications infrastructure companies were stable, while producers of renewable energies posted strong price gains. The re were also geographical differences: The S&P Global Infrastructure index (in EUR) was -13.5% in 2020, well behind its European counterpart, the MSCI Europe Infrastructure (-0.3%). The latter also left the broad European equity market (measured by the MSCI Europe: -2.8%) behind. It became clear that not all infrastructure is the same and that the stability and performance of an infrastructure portfolio can be substantially improved: with active management between cyclical and defensive segments and the different economic areas, a focus on sustainability and a value-oriented, fundamental selection of individual stocks.
Looking ahead, all the signs are that 2021 will be an extremely exciting year for infrastructure as an asset class. On the one hand, the long-term structural growth drivers for investments in basic infrastructure against the background of demographic change, digitization and climate change continue to exist; First and foremost the expansion and modernization of the transport and digital infrastructure as well as renewable energies. On the other hand, a number of developments can be observed in 2021, which should give the asset class an additional boost: the accelerated and more extensive implementation of infrastructure programs as an important part of the fiscal policy support packages, a high attractiveness of infrastructure assets for strategic and private buyers as well as a strong economic recovery in Europe, which leads us to expect a substantial increase in value, particularly in the more cyclical infrastructure segments.
China and the USA have also committed to far-reaching measures, including with regard to climate protection. The Chinese fourteenth five-year plan contains plans for a “green revolution”, in which President Xi Jinping brought climate neutrality into play by 2060. The new US government already promised ambitious climate measures in the election manifesto, which – analogous to the Paris climate agreement – see global warming of well below 2% as the goal. Overall, the new US President Joe Biden plans to invest around 2 trillion US dollars in his first term as part of his plan for a modern, sustainable infrastructure and a future based on clean energy sources.
Overall, it can be said that all currently discussed fiscal programs attach great importance to investments in the areas of energy, transport, industry and energy-efficient buildings. In addition to the size of the programs, their long-term nature is also remarkable: for example, increased planning security for private companies will be created for climate neutrality measures up to 2050 in local legislation. This means that there is considerable fiscal policy tailwind for the infrastructure asset class, which should be particularly noticeable in those segments that contribute to a sustainable and clean economic order.
Focus on Europe offers special opportunities
In Europe, many global market leaders are located in high-growth infrastructure segments, above all in the area of renewable energies. Together with the high level of regulatory security on the domestic markets, this results in great long-term growth potential, which should develop independently of the economic cycle, particularly in the context of the fiscal packages outlined above. However, the coronavirus crisis also gives the attractiveness of European infrastructure companies a tactical advantage in the new year: For 2021, the EU Commission predicts GDP growth of 4.2% (Bantleon: 4.8%) for the euro zone. In addition, there is the relatively weak recovery on the European stock exchanges compared, for example, with the US markets. In view of this strong dynamic, there are far-reaching opportunities to benefit from the further recovery, in particular in the more cyclical infrastructure segments, such as transport or environmental service providers.
In addition, there are opportunities on the European market for radio masts, which in comparison to the US market can continue to benefit greatly from consolidation in the industry and the expansion of the 5G network. Investors who are looking for regular distributions also benefit from the very high dividend yields of European infrastructure companies in international comparison.
Additional drivers: mergers, acquisitions and uninvested private equity capital
Asset rotation is a common method of completely or partially parting with the developed assets after project developments in the field of renewable energies or infrastructure construction projects have been completed in order to have capital available again for new projects. The buyers acquire a project that has already been developed, usually with long-term purchase agreements. The assets are usually transferred from infrastructure companies to the portfolios of sovereign wealth funds, private equity infrastructure funds or to institutional investors. In this context, 2021 is emerging as a particularly attractive year for infrastructure companies.
Seldom have the sales prices for infrastructure projects been so high and activity in the infrastructure sector so dynamic. In addition, there is a considerable amount of uninvested private equity capital, which is particularly looking for investment opportunities in the renewable energies sector. In the current year, for example, the British water utility Pennon sold its environmental services business to the private equity company KKR. The valuation was well above the value of listed comparable companies such as Biffa. Another example is Orsted, the global market leader in offshore wind farms, who sold a quarter of its ocean offshore wind farm (1.1 gigawatts of capacity) in the USA to the US utility PSEG.
In addition to the opportunities that arise from the sale of infrastructure projects for infrastructure companies, there are also other low-risk opportunities from the investor’s point of view: for example, by investing in takeover candidates that are in advanced contract negotiations with a very high probability of conclusion and offer potential for price improvements.
Infrastructure remains attractive in a macroeconomic context …
For the year 2021, the EU Commission expects economic growth of 4.2% (Bantleon: 4.8%) for the euro zone. The International Monetary Fund predicts growth of 3.1% for the USA (Bantleon: 4.9%). The second half of the year in particular is likely to be more dynamic than many suspect. In combination with increasing inflationary pressure (Bantleon: 1.5% for the Eurozone, 2.2% for the USA), the yield on 10-year German Bunds could turn positive in 2021 and the US Treasuries with the same maturity could be noticeably above 1%. However, there is not much more room for improvement, as the after-effects of the coronavirus pandemic, the stimuli from the central banks and the escalating fiscal policy should manifest interest rates at a low level for both economic and political reasons in the foreseeable future. Infrastructure remains attractive to investors in this macroeconomic environment.
… both with rising inflation …
Support comes from low or slightly rising interest rates and a moderate surge in inflation. Regulated returns from utilities, income from the concession business of toll roads and airports as well as other price mechanisms in the infrastructure sector often offer explicit protection against inflation. This can be regulated, for example, via the tariff setting mechanism or via concession contracts. In this way, infrastructure companies have the opportunity to pass on increased operating costs and thus protect their cash flows from inflation. On the demand side, the price mechanisms should not lead to a decline in demand, since companies in the area of basic infrastructure in particular offer essential everyday services that are difficult to replace. Some infrastructure segments, such as transport infrastructure, can even benefit significantly from the economic recovery associated with rising inflation, as both the movement of people and goods should pick up noticeably in this scenario.
… as well as slightly rising interest rates
Even the moderate rise in interest rates will not create any significant headwind for infrastructure companies in the foreseeable future. Although they tend to be more interest-sensitive than companies in other sectors, a noticeable burden only arises at significantly higher interest rates. In addition, in the long-lasting low interest rate environment, many companies have financed themselves long-term and on extremely attractive terms. The renewable energies sector in particular will continue to be able to do this within the framework of the fiscal programs. The regulated business models are also an advantage here, as rising capital costs, similar to inflationary pressure, can be adjusted in the next regulatory period at the latest.
Investment required by 2040 to achieve climate neutrality
Quelle: International Energy Agency – World Energy Outlook 2020 (Sustainable Development Scenario)
Susanne Reisch, CFA, CAIA, Senior Portfolio Manager, Global Infrastructure Equities, Bantleon
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Infrastructure stocks offer great opportunities year