Global infrastructure poised to shine on growth, inflation and value

Favourable market conditions, resilient earnings growth and attractive valuations underpin a constructive outlook for global listed infrastructure assets, says Andrew Maple-Brown, co-founder and portfolio manager, Maple-Brown Abbott in Sydney, Australia.

These assets tend to be economically sensitive with natural inflation linkages, he said in a March 25 interview. This means that in an environment of slowing growth and persistent inflation, like the current one, the backdrop is supportive for the sector.

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Global Asset Management.

“We’re excited by the earnings growth in the sector, which is being driven by massive investment needs,” he said. “The capital investment opportunity within the sector continues to grow, and is particularly being driven by the mega themes of decarbonization and digitalization.”

An opportunity set of about 100 companies is expected to invest about US$375 billion this year in organic capital expenditures, he said, including upgrading or expanding networks or airports, replacing water pipes, or widening toll roads.

And infrastructure is reasonably valued on a historical basis. “We believe that it looks cheap when compared to broader equities, and very cheap relative to where comparable assets have been trading in the private market,” Maple-Brown said.

Opportunities

Electric utilities are a key asset benefiting from strong capital spending in energy transition and digitalization, he said. There’s been investment in renewables and transmission networks, which is driving earnings growth. U.S.-regulated utilities have historically delivered earnings-per-share growth of about 4% to 6% annually, but Maple-Brown said that figure could climb to 6% to 8% over the next five years.

“Not all electric utilities have the same exposure to these themes,” he said.  “For example, the impact of data centres is much greater for utilities that are in U.S. states where the regulated utilities own the electric generation and not just the distribution and transmission, as the majority of the needed investment for data centres has been on the generation side.”

Telco towers also provide opportunities. Maple-Brown views these as essential, long-duration assets supported by growing data demand, with high barriers to entry, and attractive valuations in Europe and the U.S.

Maple-Brown is also overweight in water utilities, which have long durations and high investment-growth opportunities. “We view the capital programs of water utilities as being low risk, as they involve a large number of very small value projects, as opposed to large projects that are more susceptible to cost and time overruns.”

From a regional perspective, he’s overweight in the U.K. and western Europe due to more favourable regulations and inflation protection. For instance, regulated assets, toll roads and telco towers in the U.K. typically have inflation-linked returns, where values or revenues adjust in line with inflation.

And he’s underweight in the U.S. “mainly because we don’t view the U.S. railroads as having the low cash-flow volatility and natural inflation linkage that we seek, and so we exclude those companies from our definition of infrastructure.”

Key risk

Regulatory risk is the biggest bottom-up risk when it comes to infrastructure investing, he said. So analyzing regulators is key, to ensure that they’re both fair and predictable.

“We do also see significant differences in regulators across different regions. For example, in the U.S., most regulation is done at the state level, whilst in the U.K., the regulators are national based.”

There are also differences in how commissioners are appointed, he said. For instance, some U.S. states elect commissioners, while others appoint them.

“We’re generally cautious in relation to elected commissioners,” Maple-Brown said. “A regulator’s job is meant to be to balance the interests of the customer and the utility. And in the case of elected commissioners, they are normally more focused on pleasing the customers, for that is who will be responsible for electing them again in the future.”

To mitigate regulatory risk, Maple-Brown reviews commission behaviour over time, engages with commissioners and monitors decisions and any upcoming changes.

This article is part of the Advisor To Go program, sponsored by CIBC Global Asset Management. The article was written without input from the sponsor.

The information contained in this material are the views of Maple-Brown Abbott and compiled by CIBC Global Asset Management, as of the date of publication unless otherwise indicated, and are subject to change at any time. CIBC Global Asset Management does not undertake any obligation or responsibility to update such opinions.