Looking beyond lockdown: Opportunities and challenges for infrastructure investors

29/06/2020

Infrastructure holds an important place in the fabric of modern society, serving as the backbone of the world economy through good times and bad.

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The sector, so often resilient during downturns, has not been immune to concerns about the coronavirus pandemic. Some infrastructure shares, especially those related to transportation and energy, were caught up in the sharp global stockmarket sell-off of March 2020.

While share prices around the world recovered to varying extents from their March lows during the second quarter of 2020, the policies implemented to combat the spread of coronavirus have continued to disrupt businesses, with ramifications for investors in the short term, at least. The economic outlook remains cloudy, which is where I believe listed infrastructure businesses can show their worth.

Looking at the longer term outlook, I believe the potential opportunities presented by investing in infrastructure remain undiminished, if not enhanced. As the transition towards a lower carbon, digital economy gains momentum, the need for investment in new and improved infrastructure is coming into focus.

Dividends under pressure

The economic damage inflicted by virus-induced lockdowns around the world has threatened the ability of many different types of company to pay dividends. This includes certain areas of the infrastructure sector.

For companies whose operations have been severely disrupted by lockdown, like airports, there is quite simply less income to distribute to shareholders. In such cases, temporarily suspending dividends is often in the long-term interests of investors.

In other cases, companies have chosen to postpone or cut their dividend payments to keep cash on their balance sheets during a period of extreme uncertainty. While this might be a prudent course of action, it creates short-term challenges for those who invest for income.

The resilience of utilities

In an environment where dividends are under pressure across global markets, the valuable role that utilities can play in a portfolio is abundantly clear. In my opinion, this sector boasts a unique resilience among income-generating sectors at a time when the global economy is suffering.

By its nature, the utilities sector – which includes electricity, water and waste companies – has remained relatively unaffected by this year’s economic downturn. Moreover, these businesses and their physical infrastructure assets are often very hard to replicate and are critical to the economy, meaning future income streams can be forecast with greater confidence than most.

Indeed, against a backdrop of economic uncertainty, it’s the only sector in the US stockmarket to actually have seen forecasts of future earnings upgraded by analysts amid the pandemic.

There are never any guarantees when it comes to investing, but it highlights how utilities have proved a bastion of strength during this challenging period. Utility stocks have held up better than the stockmarket as a whole in the first half of 2020 and, crucially, with very few cuts to dividend payments.

Past performance is not a guide to future performance.

Opportunities in a ‘green’ recovery

Looking ahead, utilities are among the infrastructure sectors set to benefit most from the anticipated increase in government spending. Huge fiscal stimulus packages, amounting to trillions of US dollars, have been announced to boost economic growth, with infrastructure investment high on the agenda.

In Europe, the issue of sustainability is central to the recovery plan. “Next Generation EU” has a clear policy of promoting renewable energy and clean transport, as well as the renovation and efficiency of buildings and infrastructure to support a more circular economy.

Commitments to invest more in ‘greener’ infrastructure should prove to be a powerful tailwind for companies that own and develop physical assets, like wind farms, solar parks, and electricity grids, all of which are necessary to transition to a lower carbon future. Likewise, businesses that own digital infrastructure, in which further investment is needed to advance connectivity in a digital age.

It can be challenging to keep a long-term perspective when the market environment is very uncertain. Nonetheless, I believe infrastructure companies exposed to these structural shifts in the economy, and whose income streams are backed by owning physical infrastructure assets, are well placed to prosper for decades to come.

The value and income from a fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.

The views expressed in this document should not be taken as a recommendation, advice or forecast.