Head of Global InfrastructureMore by this author
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The prospect of enduring inflation, anemic global growth and heightened market volatility in 2023 and beyond amplify the importance of a dedicated listed infrastructure allocation.
- Listed infrastructure historically has produced above-average returns in inflationary environments
- Investor appetite for infrastructure’s attractive attributes is expected to remain high against an uncertain macro backdrop
- Challenges may prevent a rapid rebound in traditional risk assets as the economy recovers
Inflation is easing but expected to remain above trend
After the challenging inflation and interest rate shocks in 2022, the global economy is in transition. Inflation, which peaked last fall, is expected to decline further. But a rapid return to pre-pandemic conditions of sub-2% annual price increases appears doubtful. Inflation will likely remain sticky and, in the U.S., may not return to the Federal Reserve’s implied 2% target before the end of 2024 due to wage pressures, higher costs from deglobalization and other factors. In the meantime, the inflation protection mechanisms in infrastructure pricing structures should remain supportive of the asset class.
Historically, listed infrastructure has produced above-average returns when inflation is elevated but falling, similar to today (Exhibit 1). Since 1973, the asset class has produced a 9.9% average 1-year real return when inflation has been above trend but moderating. That’s an annual real return 2.3 percentage points above its long-term average of 7.6% across the entire 50-year study period.
Keep in mind that economists have consistently underestimated inflation during the last two years. Previous periods of unexpected inflation similar to what the world has recently endured (such as post-WWII and the 1970s) saw a considerable volatility in inflation following its initial containment. We believe those historical periods correlate with the environment we are moving towards, suggesting the potential for future challenges in predicting inflation. And it accentuates the value of an infrastructure allocation as a portfolio inflation hedge.
Infrastructure has produced above-average returns when inflation was high but moderating
Infrastructure average 1-year real return (Jan. 1973–Mar. 2023)
At March 31, 2023. Source: Refinitiv Datastream, Cohen & Steers analysis.
Data quoted represents past performance, which is no guarantee of future results. The information presented above does not reflect the performance of any fund or other account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. There is no guarantee that any market forecast set forth in this presentation will be realized. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin. See end notes for additional disclosures.
Today’s macro environment suggests the appetite for infrastructure’s attributes will remain high
A spirited debate is being waged these days about the economy’s direction. A recession is possible in 2023 as the effects of credit tightening and the recent banking crisis work through the system. And the risk to growth appears to be to the downside.
Central banks are in the difficult position of balancing still-high inflation alongside financial sector instability. Backing off from further tightening to allow financial markets to stabilize may further exacerbate inflationary pressures. On the other hand, continuing to hike rates to curb inflation may further inflame financial market stress, particularly since the root cause of the recent banking crisis stems from a deeply inverted yield curve. Complicating the situation, banks are tightening lending standards, which typically leads to a slowdown in growth (particularly in the most rate-sensitive areas of the economy, such as equipment and construction) and a reduction in hiring.
Infrastructure’s predictable cash flows are a function of price and volume
Revenue drivers of infrastructure subsectors
At March 31, 2023. Source: Cohen & Steers.
This chart is for illustrative purposes only and does not reflect information about any fund or other account managed or serviced by Cohen & Steers. There is no guarantee that any historical trend referenced above will be repeated in the future, and there is no way to predict precisely when such a trend will begin. There is no guarantee that any market forecast set forth in this presentation will be realized. See end notes for additional disclosures.
Regardless of the potential depth and length of the recession, we expect investor demand for infrastructure to remain high. This is partly because the asset class generally has lower volatility relative to the broader stock market due to its defensive traits, such as inelastic demand for infrastructure services and companies’ fairly stable cash flows (Exhibit 2).
Challenges may prevent a rapid rebound in traditional risk assets
Infrastructure has historically outperformed the broad global equity market in three of four phases of the business cycle (Exhibit 3). Our study is conditioned on recessions as reported by the National Bureau of Economic Research (NBER) and expansion subdivisions based on the Conference Board’s Composite Index of Coincident Indicators. Infrastructure has outperformed the broader equity market in periods characterized by overheating economic conditions (late cycle), business cycle downturns (recession) and the recoveries that follow (early cycle).
While the NBER did not declare a recession in 2022, the year saw several hallmarks of one, including two consecutive quarters of negative growth, a steep yield curve inversion and a pronounced drawdown in equity prices. The banking crisis may intensify the severity of the current recessionary period.
We believe challenges in the new economic paradigm—including persistent higher inflation and higher nominal interest rates—may prevent the rapid acceleration in economic activity usually seen in the early cycle recovery stage. For instance, with little slack currently in the system, a sharp rebound in corporate profits appears unlikely.
Consequently, a typical V-shaped rebound in traditional risk assets may not occur either. Equity valuations in most markets appear only fair, not cheap, and higher structural inflation alongside greater volatility suggests that risk premia will remain elevated, which may limit equities’ price gains. Such conditions set the stage for infrastructure to potentially outperform the broad equity market, as investors favor these businesses for their stable cash flows and attractive income generation capacity.
Listed infrastructure historically has outperformed in 3 of 4 business cycle phases
Returns vs. global equities (%)
At December 31, 2022. Source: Cohen & Steers.
Past performance is no guarantee of future results. An investor cannot invest directly in an index, and index performance does not reflect the deduction of any fees, expenses or taxes. The information presented above does not reflect the performance of any fund or other account managed or serviced by Cohen & Steers, and there is no guarantee that investors will experience the type of performance reflected above. Returns based on the annualized arithmetic mean of monthly returns. U.S. recessions are determined by the NBER (82 of 600 months). Expansion periods subdivided by Cohen & Steers based on major trends in the Conference Board’s Composite Index of Coincident Indicators (CBCI): early cycle (accelerating CBCI; 173 months), mid-cycle (stable CBCI; 225 months) and late cycle (decelerating CBCI; 120 months). Infrastructure returns are based on a composite of sectors in the Refinitiv Worldstream Index series that Cohen & Steers believes are largely representative of today’s global listed infrastructure universe, allowing for a longer-term, multi-cycle analysis than what is available with modern listed infrastructure indexes. The composite had a 0.95 correlation to the FTSE Global Core Infrastructure 50/50 Index since the FTSE index’s inception in 2009. Global equities based on the Refinitiv Worldstream Global Equity Index. See end notes for index associations, definitions and additional disclosures.
Index definitions and important disclosures
An investor cannot invest directly in an index and index performance does not reﬂect the deduction of any fees, expenses or taxes. Index comparisons have limitations as volatility and other characteristics may diﬀer from a particular investment.
Global listed infrastructure: The Datastream World Index Series consists of free-float-adjusted, market-capitalization-weighted global and regional indexes of companies in their respective sectors (Utilities, Rails, Transportation Services, Pipelines (midstream energy) and Travel & Tourism), compiled by Refinitiv Datastream. Electric, Gas and Water are subsets of Utilities. Telecoms represented by a custom capitalization-weighted index consisting of AMT, CCI, SBAC and SESG beginning 1998. These sector-level indices have a longer time series than the FTSE Global Core Infrastructure 50/50 Total Return Index (FGCIICUT), which allows analysis of a continuous index back to 1973. Global listed infrastructure overall performance represented by a market capitalization-weighted aggregate of sector indexes. This index exhibited a 96.4% correlation to the FGCIICUT since the latter’s inception in 2006, based on 1-month total returns over this sample. Global Equities: Refinitiv Datastream Global Equities index is a free-float-adjusted, market-capitalization-weighted index designed to serve as a broad market benchmark to track the performance of liquid equities worldwide.
Data quoted represents past performance, which is no guarantee of future results. The views and opinions presented in this document are as of the date of publication and are subject to change. There is no guarantee that any market forecast set forth in this document will be realized. This material represents an assessment of the market environment at a specific point in time and should not be relied upon as investment advice, does not constitute a recommendation to buy or sell a security or other investment and is not intended to predict or depict performance of any investment.
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Risks of investing in listed infrastructure. Infrastructure issuers may be subject to regulation by various governmental authorities and may also be affected by governmental regulation of rates charged to customers, operational or other mishaps, tariffs and changes in tax laws, regulatory policies and accounting standards. Foreign securities involve special risks, including currency fluctuations, lower liquidity, political and economic uncertainties and differences in accounting standards. Some international securities may represent small and medium-sized companies, which may be more susceptible to price volatility and less liquidity than larger companies.
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