Why infrastructure is too critical to overlook

08/04/2020

In what has been the worst quarter for global stockmarkets since 1987, very few corners of the market have found shelter from the sell-off.

Even the infrastructure sector, so often resilient during downturns, has not been immune to concerns about the damage that the coronavirus pandemic will do to the global economy and to companies.

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It has been a shock to see normally busy airports and toll roads emptied by stay-at-home policies put in place by governments to combat the spread of the virus. Yet at the same time, certain infrastructure assets have never been in such demand as during the past weeks.

Evolving infrastructure proves its value

While traffic on the roads has plummeted, traffic along the underground optical fibre networks that transmit data has rocketed, as hundreds of millions of us have been confined to our homes.

It demonstrates how we rely on the unseen infrastructure that underpins the digital economy every bit as much as on the infrastructure that forms the backbone of the traditional economy. Without the infrastructure enabling digital activity, we would not be able to work from home or make online payments.

This ‘evolving’ infrastructure has proven its critical role in society, and I believe more of it will be needed over the coming years. The more we use our mobile devices to bank, shop and view content, the more phone masts will be needed to transmit the data – and the more data centres will be required to process it.

Critical infrastructure remains vital

Among the infrastructure shares most caught up in the market sell-off of March 2020 were those in the transport sector. For companies that own these assets, lower demand translates into lower revenues. This, in turn, will probably limit their ability to pay dividends to their investors in the coming months.

Looking further ahead, though, these transport assets remain absolutely critical as the arteries of economies. Once this challenging period has passed – and it will, eventually – economic activity will rebound, and roads and airports will play an essential part in that recovery.

There is admittedly more of a question mark over the short-term outlook for infrastructure owners in the oil and gas sector. Shares of these companies have been indirectly hit by a perfect storm, of abundant supply and falling demand from industry and consumers, which has pushed the global oil price below US$20 a barrel – its lowest since 2002.

Nonetheless, assets like pipelines are often supported not only by contractual revenue streams, but also by barriers to entry. Physical infrastructure assets are not easy to replicate and, where they are critical to the economy, will retain a structural value for their owners.

Targeting long-term income streams

It can be challenging to keep a long-term perspective when the market environment is very uncertain. Yet we should remember what it is we are aiming to achieve through our investments and that these goals are measured in years, rather than months. Taking a long-term view allows us to capitalise on the opportunities created by price distortions in markets.

In my view, this downturn presents a chance to invest in companies whose income streams are backed by owning physical infrastructure assets, as well as long-term structural shifts in the economy.

Tailwinds not only support growing demand for digital infrastructure, but also the likes of renewable energy infrastructure. With wind and solar electricity generation playing a pivotal role in curbing carbon emissions, there will be a need for more and more of these assets.

I do not think structural demand for infrastructure like this will be derailed by this pandemic, or the market downturn it precipitated. When share prices have fallen indiscriminately, I believe there are compelling opportunities for long-term investors targeting growing dividends to snap up sustainable income streams.

Past performance is not a guide to future performance.

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.