Specialist in Asia Pacific, Japan, China, India and South East Asia and Global Emerging Market equities.

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Stewart Investors manage investment portfolios on behalf of our clients over the long term and have held shares in some companies for over 20 years. They launched their first investment strategy in 1988.

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Power to price: Inflation, infrastructure and the social license to operate

Pricing power is now a major consideration with inflation on the rise. Equal consideration needs to be given to the social license of companies to raise prices in line with community expectations.

Some essential services might be in a better position to raise prices in line with or ahead of inflation than others, just as regulators and governments in certain regions are more open to allowing companies to mandate price increases.

Understanding how companies operate on the ground in these regions, and to what extent they are appropriately managing their social license in the eyes of regulators and society are important considerations in managing risks and opportunities within infrastructure portfolios.

Cost of living concerns in Europe, for instance, have brought new electricity tariffs and windfall profit taxes of late. Water, electricity and gas utilities are essential services that have real implications on cost of living for many.

Infrastructure companies in the United States tend to have more certainty than those in other regions such as Europe and Australia. In the US there tends to be greater separation between the political and regulatory environment.

State-based regulation tends to prevail in the US, where there are more negotiated outcomes taking into account the benefits these companies bring to economies and societies including jobs and spending.

Not all industries are created equal. Rail and waste companies have recently been able to demonstrate their strong pricing power, meaning price increases within these industries are somewhat easy to push through to match and exceed rising inflation.

Waste companies in particular have described the current pricing environment as the best they’ve seen in multiple decades, recent company visits in the US have revealed.

Other types of companies, such as toll roads operators, need to work continually to maintain their social license within the community as inflation pushes prices up.

Introducing toll road relief for those most vulnerable to cost of living increases, or for front line workers during extra-ordinary periods such as during COVID lockdowns are good examples of a company acknowledging its position as an essential service and protecting its social license to operate.

Inflation hedge

Infrastructure companies are considered as an inflation hedge based on their ability to increase prices in line with or exceeding their cost inflation without destroying demand.

Overall, infrastructure tends to have high barriers to entry, they’re often monopolies, such as a regulated utility, or they operate in an oligopoly market structure.

These are companies with so-called sustainable or structural rather than cyclical economic growth drivers.

Infrastructure services will continue to be used through periods of economic downturns, which makes them valuable to investors based on their ability to produce steady cash flows.

Stagflation: around the corner?

While some believe current inflation increases might be transitory, a scenario of higher for longer inflation could result in a more structural inflationary environment.

Higher for longer inflation could result in a pullback in real economic growth and spending, opening the door for stagflation to emerge.

The combination of high inflation and low economic growth is a relatively positive environment for infrastructure given the minimal impact on cash flows compared to other sectors.

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