News & Views

Infrastructure24 March 2020

Why do we like infrastructure?

There is a need for a large amount of infrastructure spend globally, both in emerging and developed economies. Infrastructure assets generate a stable and usually inflation protected income. This inflation protection is desirable for its defensive qualities as it gives a degree of protection for future spending powers. Also the yield on infrastructure assets is currently better than can be achieved from cash and government bonds.

Infrastructure, by its very nature, represents the types of assets whose functions benefit from stable demand throughout varying economic and social environments. Critical services such as power do not cease to be required in the current environment.

What has happened

Infrastructure assets have long term, visible cash flows that are usually insensitive to broader economic conditions. Fundamental earnings powers of infrastructure companies should not have been impacted significantly by the pandemic, however where correlations between assets were expected to widen, with more defensive assets holding up, the extreme state of panic surrounding the pandemic has meant that most assets have been tarred by the same brush and experienced significant downward pressure and hence infrastructure assets have not been immune from the panic currently gripping markets.

Looking forward

As and when markets start to normalise we expect the steady earnings that will have been generated by infrastructure assets, over this time, to be recognised and it is therefore feasible that these assets will demonstrate a swifter recovery. A further benefit for these assets is that interest rates have been cut in the UK and US and hence the yield achievable through infrastructure will enhance its desirability.

The defensive nature of infrastructure stood the funds in good stead at the start of the Coronavirus crisis with the sector as a whole falling less than half of the FTSE All Share, indeed our more defensive infrastructure funds fell less than a quarter of the FTSE Allshare over this time frame. However with the continued falls in the market impacting everything the infrastructure funds held have from start of the year to 17th March 2020 now fallen two thirds of the fall seen in the FTSE All Share. What may be of some comfort is that the consistent cash flow generation and long term contracts, linked to inflation, means that when the market recovers these assets tend to recover more quickly. Looking back to the 2008 Financial crisis Infrastructure assets took 7 months to rebound back to their previous highs, compared with the FTSE All Share which took 16 months to recover its losses.

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