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Global listed infrastructure – A safe harbour for investors?

Infrastructure describes the physical assets that provide basic services to modern society, including utilities, transport and communication assets. The fundamental, essential nature of the services provided gives global listed infrastructure qualities that can be beneficial to an investment portfolio.

A hedge against inflation?

Global listed infrastructure has outperformed global equities as inflation has risen over the past year. This is a reflection of listed infrastructure being a price maker, not a price taker. Infrastructure’s tangible assets provide essential services, using contracted or regulated business models. These assets consistently demonstrate the ability to pass though the effects of higher input costs and inflation to the end user. This can be achieved through regulated real returns for utilities, or through contracts which explicitly link tolls or fees to the inflation rate.

Infrastructure’s capital intensive nature provides high barriers to entry which have allowed incumbent operators in other sectors, such as mobile towers and freight rail, to achieve similarly robust pricing results even without explicit inflation links.

An analysis by First Sentier Investors’ listed infrastructure team has found that more than 70% of assets owned by listed infrastructure companies may have effective means to pass-through the impacts of inflation to customers, to the benefit of shareholders. The following chart illustrates how listed infrastructure has outperformed global equities when inflation was higher.

Is listed infrastructure recession proof?

Listed infrastructure has also demonstrated an ability to provide most of the upside in rising equity markets, while offering protection from falling ones. This pattern of performance is underpinned by global listed infrastructure’s consistently strong pricing power, predictable cash flows, and relative immunity to economic cycles. This ability to hold up in falling markets has enabled the asset class to generate higher returns than global equities over the past 20 years, with less risk, as measured by standard deviation of returns1.

First Sentier Investors’ listed infrastructure team have undertaken modelling to estimate the potential impact of a recession on different sub-sectors within the asset class. This modelling assumes a -3% change in GDP (from a previously-assumed GDP growth rate of +2% to a decline of -1%), with associated multiplier effects on industrial production, housing starts, commodities etc. This analysis suggests listed infrastructure may suffer less than half the earnings impact relative to broader markets in this scenario, represented by the S&P 500 index.

Structural growth drivers

Providing further support to infrastructure as an investment is the extent to which it positively aligns to structural growth themes occurring across the globe. Decarbonisation, the electrification of transport, and ever-growing demand for online connectivity all require unprecedented investment in supporting infrastructure. These themes are not transitory and will not be derailed by an economic downturn.

For example, we are optimistic about the substantial investment opportunities associated with the decarbonisation of the world’s energy needs. Utilities, which represent about a half of the listed infrastructure opportunity set, are positioned to derive steady, regulated earnings growth by building solar and wind farms, and by upgrading and expanding the networks needed to connect these new power sources to the end user.

US utility companies Entergy, NextEra Energy and PPL Corp recently increased their earnings guidance as a result of additional investment in these areas – a welcome contrast to the turmoil seen elsewhere in financial markets. The roll-out of electric vehicles is expected to provide an additional boost to utilities in the medium term – first from investment opportunities associated with linking EV charging stations to the grid; and then from higher overall demand for electricity.

Digitalisation is another key theme for the asset class. Structural growth in demand for mobile data (underpinned by an ever-growing reliance on digital connectivity) continues to support steady earnings growth for Towers and Data Centres, insulating them from the ebbs and flows of the broader global economy. The adoption of 5G technology over the medium term will require networks to handle increased data speed, and a much higher number of connected devices.

Statistics from the 2022 Ericsson Mobility Report highlighted the continuation of this theme. Key points including global mobile network data traffic growing by 40% during the March quarter of 2022, compared to the same period a year earlier; and the forecast that mobile network traffic will increase at a compound annual growth rate of 29% through to 2027. This bodes well for continued capital expenditure into mobile networks, to the benefit of Towers.

Conclusion

Listed infrastructure offers a relatively safe harbour for investors navigating an increasingly uncertain and volatile world. Across a range of economic environments and world events, the asset class has shown an ability to out-perform many other asset classes over the medium to long term.

There is no reason to believe this enduring quality is less today than it has ever been. We believe listed infrastructure remains a compelling opportunity and should be considered a core component within investors’ portfolios.

1 As at 30 June 2022, comparing the FTSE Global Listed Infrastructure 5050 Index with the MSCI World Index.

Source: First Sentier Investors, Bloomberg, as at September 2022

Important Information

This material is for general information purposes only. It does not constitute investment or financial advice and does not take into account any specific investment objectives, financial situation or needs. This is not an offer to provide asset management services, is not a recommendation or an offer or solicitation to buy, hold or sell any security or to execute any agreement for portfolio management or investment advisory services and this material has not been prepared in connection with any such offer. Before making any investment decision you should consider, with the assistance of a financial advisor, your individual investment needs, objectives and financial situation.

We have taken reasonable care to ensure that this material is accurate, current, and complete and fit for its intended purpose and audience as at the date of publication. No assurance is given or liability accepted regarding the accuracy, validity or completeness of this material and we do not undertake to update it in future if circumstances change.

To the extent this material contains any expression of opinion or forward-looking statements, such opinions and statements are based on assumptions, matters and sources believed to be true and reliable at the time of publication only. This material reflects the views of the individual writers only. Those views may change, may not prove to be valid and may not reflect the views of everyone at First Sentier Investors.

About First Sentier Investors

References to ‘we’, ‘us’ or ‘our’ are references to First Sentier Investors, a global asset management business which is ultimately owned by Mitsubishi UFJ Financial Group. Certain of our investment teams operate under the trading names FSSA Investment Managers, Stewart Investors and Realindex Investments, all of which are part of the First Sentier Investors group.

We communicate and conduct business through different legal entities in different locations. This material is communicated in:

  • Hong Kong by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. First Sentier Investors is a business name of First Sentier Investors (Hong Kong) Limited.
  • Singapore by First Sentier Investors (Singapore) (reg company no. 196900420D) and this publication or advertisement has not been reviewed by the Monetary Authority of Singapore. First Sentier Investors (registration number 53236800B) is a business division of First Sentier Investors (Singapore).
  • Japan by First Sentier Investors (Japan) Limited, authorised and regulated by the Financial Service Agency (Director of Kanto Local Finance Bureau (Registered Financial Institutions) No.2611)

To the extent permitted by law, MUFG and its subsidiaries are not liable for any loss or damage as a result of reliance on any statement or information contained in this document. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment products referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk, including loss of income and capital invested.

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