Key Takeaways: Max Template - Cohen & Steers

Executive Summary

In the webinar, Michelle Butler and Ben Morton from Conan Sears discuss the strategic case for investing in listed infrastructure, the current market outlook, and the complementary nature of listed and private infrastructure allocations. They highlight the global need for infrastructure spending, emphasizing the role of private sector involvement due to government debt burdens. Listed infrastructure is presented as a compelling investment due to its essential public services, regulated nature, predictable cash flows, high barriers to entry, and inflation linkages. The discussion covers the diversification benefits, low beta to global equities, and attractive valuations of listed infrastructure, particularly in the context of macroeconomic trends such as decarbonization, digital transformation, and deglobalization. The webinar concludes by underscoring the defensive characteristics, diversification benefits, and alignment with long-term growth opportunities of listed infrastructure investments.

Speakers

• Benjamin Morton, Executive Vice President, Cohen & Steers
• Michelle Butler, Senior Vice President, Cohen & Steers

Key Takeaways

1. Private Sector Crucial: Governments alone cannot meet global infrastructure spending needs, making private sector involvement crucial for financing, owning, and operating infrastructure assets.

2. Compelling Long-Term Investment: Listed infrastructure offers equity-like returns with lower volatility, high inflation sensitivity, and attractive downside benefits, making it a compelling long-term investment.

3. Attractive Market Outlook: The current market outlook supports allocating to listed infrastructure due to attractive valuations, market uncertainty, inflation risks, and long-term themes like decarbonization and digital transformation.

4. Inflation-Linked Cash Flow: Different infrastructure sectors, such as utilities and toll roads, have distinct pricing mechanisms linked to inflation, providing varying levels of cash flow predictability.

5. Discounted Entry Point: Listed infrastructure investments are currently trading at a 10% discount relative to global equities, presenting an attractive entry point driven by defensive characteristics and alignment with long-term secular growth opportunities.

Key Quote

Governments are not able to go at this alone, right? Increasing debt burdens on the part of governments really limit their ability to spend. We clearly see that, as represented by the current administration here in the US, with efforts to reduce government spending and find avenues to capital formation that allow for private sector involvement.

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Webinar

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Strategic Advantages of Listed Infrastructure Investments

Investing in listed infrastructure has gained traction among investors, especially given the current economic conditions. Listed infrastructure encompasses publicly traded companies that manage essential services like utilities, transportation networks, and communication systems. These assets are indispensable for economic growth and societal development, presenting a stable and reliable investment option.

Infrastructure investments are appealing due to their predictable cash flows and high barriers to entry. Despite recent underperformance, infrastructure assets are currently trading at a 10% discount, a valuation we find unjustified considering the macroeconomic environment. Factors like slowing global growth, potentially peaking interest rates, and higher-than-expected inflation contribute to a period of higher uncertainty. In this scenario, infrastructure assets should ideally trade at par with, or even at a premium to, broader equity market valuations.

The sector stands to benefit from several mega trends, such as decarbonization and increased power demand, which are driving significant interest and investment. This blog will delve into the strategic case for investing in listed infrastructure, assess the current market outlook, and discuss how allocations to both listed and private infrastructure can complement each other to create a more robust portfolio.

Strategic Benefits of Investing in Listed Infrastructure

Investing in listed infrastructure presents a compelling strategic case due to several key benefits. These businesses provide essential public services that drive economic growth and are typically regulated or concession-based, ensuring predictable cash flows. High barriers to entry preserve the enduring value of existing assets. Additionally, most infrastructure businesses have pricing mechanisms linked to inflation, offering a hedge against inflationary pressures. Historically, listed infrastructure has delivered equity-like returns with lower volatility compared to broader equity markets, making it an attractive option for investors seeking stable returns.

The current market outlook for listed infrastructure is favorable, supported by several aligning factors. Market uncertainty and inflation risks are prevalent, and listed infrastructure has historically outperformed during periods of elevated volatility. The asset class also offers attractive downside benefits, with infrastructure typically experiencing less severe declines during market drawdowns. The majority of the move in interest rates is likely behind us, potentially serving as a tailwind for infrastructure investments. Valuations for listed infrastructure are currently attractive, trading at a discount relative to global equities.

Combining listed infrastructure and private infrastructure allocations can create a more complete portfolio. Private infrastructure investments involve direct ownership of assets, providing additional diversification and access to unique opportunities. This combination allows investors to benefit from the liquidity and transparency of listed assets while gaining exposure to the long-term growth potential of private investments, enhancing portfolio stability and offering comprehensive exposure to the infrastructure sector.

The diversification benefits of listed infrastructure are significant, especially in the current economic environment. Listed infrastructure tends to have a lower beta to global equities, meaning it is less correlated with broader market movements. This low overlap with equities and unique attributes make it an effective tool for portfolio diversification. Additionally, the asset class offers attractive downside benefits, valuable during periods of market uncertainty. As secular growth opportunities in infrastructure continue to evolve, the priorities for allocating to the asset class may shift, but diversification will likely remain a key driver.

Growing Power Demand and Infrastructure Investment Opportunities

The demand for power is projected to grow at an annualized rate of 3-4% through 2030, a significant increase from the less than 1% growth seen in previous decades. This surge is driven by trends in electrification, industrial production, and the expansion of data centers. The U.S. is witnessing a substantial rise in manufacturing investment spending, bolstered by favorable legislation and incentives. Data centers are also playing a major role in the growth of power demand, with utilities and system operators nationwide expecting notable increases in power requirements. This scenario presents a strong case for infrastructure investments, particularly in renewable energy, gas-fired generation, and the necessary transmission infrastructure to support this new power.

Digital transformation is another crucial factor driving infrastructure investment, benefiting cell tower companies, data centers, and satellite operators. The increasing data intensity of mobile traffic, fueled by industrial, military, and agricultural applications, emphasizes the need for robust digital infrastructure. Geopolitical dynamics, including tariffs and supply chain shifts, further influence the infrastructure landscape. These developments offer opportunities for active managers to pinpoint winners and losers within the marine, port, and freight rail sectors. The varying performance among sub-sectors and individual companies underscores the importance of understanding the specific factors driving each segment.

Investing in listed infrastructure is a strategic move due to its essential role in economic growth, predictable cash flows, and attractive downside benefits. The current market conditions provide a supportive environment, with infrastructure acting as a hedge against inflation and presenting favorable valuations. Combining listed and private infrastructure allocations enhances portfolio diversification and stability. The sector's evolution and alignment with long-term trends offer unique attributes and growth potential, making listed infrastructure a valuable addition to any portfolio.