How infrastructure can benefit from the green recovery, March 2021

Usually a defensive asset class in a recession, infrastructure struggled in 2020 as lockdowns had an unprecedented impact on transport in particular. In this interview, Peter Meany, co-manager of First Sentier Global Listed Infrastructure fund, talks to us about the move to renewable energy and gives his outlook for 2021.

Infrastructure is usually seen as a defensive asset class, but the pandemic turned that assumption on its head – tell us a bit more about 2020 and the impact of COVID-19

“Yes, it was challenging year for infrastructure. Traditionally, it’s a more defensive asset class, given the tangible cashflow-generating businesses that we invest in. But the lockdowns that followed COVID have had very direct impacts on transport infrastructure.

“The biggest impact was really felt in the airport sector. We saw travel around the world cease - intercontinental or international traffic is down more than 90%. Domestic and intra-EU travel has been a little bit better, and we've seen - when lockdowns have been eased - domestic travel getting back to somewhere around 50% of where it was before. So there are signs that when lockdowns ease, things can recover quite quickly. There will be pent up demand for leisure trips and people going to see families, but we’re unlikely to see a recovery in business travel back to pre-pandemic levels.

“The area we're most excited about is the toll roads. We think the next phase of recovery from Covid will lead to an increase in private car use, as people prefer their own space over public transport. Working from home will be a continued negative, but some of this will be offset by the switch to cars. It may take a few years to return to public transport use.

“Some other areas did well though – mobile towers and data centres for example. And that's probably not a surprise given how well tech in general has done across the market. The acceleration of move to mobile data has come through during COVID and obviously we've got 5G and that upgrade cycle. You need a lot more towers to provide that high frequency intensity. As we move more into the cloud, data centre usage has gone up as well.”

What about the more to renewable energy and electric vehicles – are there infrastructure opportunities to be had here?

“We think electric vehicles are going to be the way forward. Hydrogen fuel cells don’t seem to be good enough to compete, so manufacturers are putting everything into electric power by lithium-ion cells. Hydrogen is likely to have more use for industrial purposes, replacing the coal or oil use of today.

“But whatever the outcome, you’ll need a green energy source to create it: on and offshore wind, or solar, and the charging stations to bring that all together.

“We think you can best get exposure to this through the utilities – not by trying to pick the winner from those developing the technology. 80% of the money made from a charging station goes to the utility provider – selling the electricity. 20% goes to the car manufacturer and the person building the station.”

What is your outlook for the asset class?

“The outlook for the asset class is positive. Government attempts to improve weak economic fundamentals through infrastructure and green energy stimulus plans are likely to benefit many global listed infrastructure firms. In particular, the ongoing repair and replacement of old energy transmission and distribution grids, along with the accelerating build-out of renewables, should represent a steady source of utility earnings growth over long time frames.
“As vaccine programs ramp up, there is also scope for a recovery in traffic / passenger volumes across coronavirus-impacted infrastructure sectors such as toll roads, airports and passenger rail.
“From a relative perspective, a slow or uneven economic recovery would favour structural themes – such as investment in mobile telecom networks to support increasing demand for mobile data – over cyclical growth opportunities. We also note that financial market pessimism towards global listed infrastructure and optimism towards higher risk assets has driven an increase in intrinsic value across the asset class. This bodes well for future global listed infrastructure performance.”

Other funds investing in infrastructure assets:

1. Legg Mason IF ClearBridge Global Infrastructure Income

A new entry into the Chelsea Selection in October 2020, this fund taps into the growing need for new and updated infrastructure projects – such as roads and utility systems - from across the globe, including both developed and emerging markets. The preference for regulatory or government supported businesses, as well as a high proportion of inflation-linked payments, makes for a dependable income stream.

2. VT Gravis UK Infrastructure Income

Another fund on the Chelsea Selection is VT Gravis UK Infrastructure Income. This fund invests mainly in investment trusts exposed to different types of UK infrastructure - from railways and roads to GP surgeries and solar power. It has an income target of 5% per annum, which is distributed quarterly, and offers exposure a less volatile and higher-yielding area of the UK economy.

3. M&G Global Listed Infrastructure

M&G Global Listed Infrastructure fund looks for a balance of growth and income from three key areas of the sector: economic, social and ‘evolving’ infrastructure. This means investments can include anything from utilities and toll roads to health, education and civil buildings, as well as mobile towers, data centres, payment companies and royalties.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the manager and do not constitute financial advice.

Published on 31/03/2021