Following a relatively strong performance for global listed infrastructure in 2022, infrastructure underperformed in 2023 amid an equity market driven by a handful of technology companies. We believe stronger-than-expected global economic growth and declining inflation have undermined the more defensive appeal of infrastructure, which investors are underestimating in the current macroeconomic environment.
We believe macro uncertainty remains and in many cases equity valuations do not yet reflect this. That said, we believe now is an exciting time for investors to deploy global listing infrastructure based on three factors that favor the asset class over the long term.
Attractive performance characteristics in an uncertain macro context
The infrastructure sector has long-term resilience and relative outperformance during periods of stock market volatility, particularly during nearly all market declines of more than 5% since 2007.
The asset class has also delivered strong relative returns during periods of higher-than-expected inflation compared with stocks and bonds. Furthermore, infrastructure has historically outperformed global equities in three of the four phases of the business cycle: late-cycle periods characterized by economic overheating, recessions and early recoveries. This is due in part to the inelasticity of demand and the fundamentally public nature of the infrastructure business, which makes cash flows predictable and less volatile in all economic environments.
Attractive valuation
Given the underperformance of infrastructure in 2023, the asset class is set to enjoy its most attractive relative valuations since the global financial crisis. Today, the impact of high interest rates is felt deeply in infrastructure valuations, while global equity markets have yet to reflect broader macro uncertainty. While we believe the sell-off in infrastructure stocks is overdone, it presents unique investment opportunities at discounted valuations, particularly for active managers who are able to take advantage of such market disruptions.
Diversification through key investment themes
Global Listed Infrastructure may be an attractive allocation as it has little overlap with broad equity positions, accounting for only 4% of the MSCI World Index. This asset class provides access to sub-sectors and investment themes that are typically underrepresented in broad equity market allocations, such as transportation or cell phone towers, while also providing geographic diversification. Listed allocation liquidity can also be used to quickly take advantage of disruptions occurring in the market. As a result, the Listed Infrastructure Portfolio provides exposure to a broad range of industries, geographies and market capitalizations.
Infrastructure is also well-positioned to benefit from the development of clean energy. Increased policy and economic support for these measures, such as the Inflation Reduction Act, provides a significant boost to related businesses in the infrastructure sector, such as utilities and pure-play producers of solar and wind energy.
However, we believe that conventional energy sources will need to continue to play a role in meeting energy needs, alongside alternative energy sources, for the foreseeable future. As a result, what we call “incremental energy” is creating compelling investment opportunities in sub-sectors such as midstream energy, where companies play a key role in processing, transporting and storing energy commodities such as natural gas.
Other important investment themes and opportunities are also emerging in the infrastructure sector, including but not limited to widespread modernization of infrastructure after decades of historical underinvestment; New themes such as artificial intelligence support the digital transformation of the economy and drive exponential growth in data demand, Benefits for data centers and cell phone towers; increased supply chain support for transportation sectors such as freight rail and seaports.
The appeal of long-term allocations
We believe the challenges of the new economic model – including persistently higher inflation and higher nominal interest rates – could hamper the rapid acceleration in economic activity that typically occurs in the early stages of a cyclical recovery. As 2024 approaches, we believe global growth will remain well below trend. Interest rates are likely to remain high, but are certainly closer to peaking than bottoming, while inflation, while declining, is likely to remain above trend, with the possibility of rising inflation again. Against this backdrop, we believe listed infrastructure is an attractive allocation for investment portfolios and may benefit investors in the long term.
Ben Morton is global infrastructure leader at Cohen & Steers.
