Head of Global InfrastructureMore by this author
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Even after strong performance in 2021, listed infrastructure stands to potentially benefit in 2022 from a favorable macro backdrop, investors’ search for inflation protection, and attractive valuations.
- An increased desire for inflation protection is drawing favorable attention to the asset class.
- Valuations on listed infrastructure compared with broad equities are at historically attractive levels.
- Our favored subsectors currently include freight rails and midstream energy, based on a combination of improving fundamentals and attractive valuations.
Inflation concerns putting a spotlight on the asset class
Global infrastructure stocks had a total return of 15.7% in 2021 as measured by the FTSE Developed Core Infrastructure 50/50 Index. Amid an environment of broad economic reopenings, top performers tended to be more economically sensitive companies, although certain secular growth names also performed well.
Sector performance varied widely within infrastructure. Midstream energy stocks, for instance, rose more than 30% in the year amid strong energy market fundamentals. Marine ports also significantly outpaced broad stocks, aided by an improving outlook for global trade.(1)
As 2022 progresses, we see potential for infrastructure to deliver another year of attractive returns, for two key reasons. First, the asset class has tended to outperform global equities during periods of both slowing growth (due to the relatively predictable cash flows associated with essential public services) and higher inflation, a macro environment we believe is likely to persist this year. (Inflation, which began 2021 at still-modest levels, jumped to a 40-year high by year-end as stimulus-driven demand met with supply-chain constraints.) Second, infrastructure could further benefit from investors’ increasing valuation consciousness, as relative valuations are currently attractive versus broader equities.
Beneficial inflation characteristics
Infrastructure has historically delivered strong relative returns during periods of higher-than-expected inflation, compared with modest or negative relative performance for stocks and bonds (quantified in Exhibit 1 as “inflation beta”—the measure of outperformance of an asset class amid inflation surprise). This positive sensitivity has resulted from inflation-linked pricing mechanisms in many infrastructure pricing models, which provide for contractual adjustments to user fees. These adjustments may be based on fixed increases approximating inflation or on variable increases linked to consumer or producer price changes (see Exhibit 3). Furthermore, certain subsectors—particularly in transportation infrastructure—may benefit from rising throughput in a strong economy (which typically accompanies inflation).
(1) Source: FTSE Developed Core Infrastructure 50/50 Index
Strong relative returns in inflationary periods
Inflation beta, June 1991–December 2021
At December 31, 2021. Source: Bloomberg, Refinitiv, U.S. Bureau of Labor Statistics, Cohen & Steers proprietary analysis
Past performance is no guarantee of future results. Inflation beta is the linear regression beta of 1-year real returns to the difference between the y/y realized inflation rate (U.S. CPI) and lagged 1-year-ahead expected inflation (median inflation expectation from Univ. of Michigan Survey of 1-year-ahead inflation expectations), including the level of the lagged expected inflation rate. 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 investors will experience the type of performance reflected above. 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 will begin. The mention of specific sectors is not a recommendation or solicitation to buy, sell or hold any particular security and should not be relied upon as investment advice. See endnotes for index associations, definitions and additional disclosures.
In addition to its relative outperformance, infrastructure has also often delivered more attractive absolute returns than stocks or bonds in periods of rising and unexpected inflation (Exhibit 2).
Infrastructure has the potential to perform well in both relative and absolute terms during periods of inflation.
Infrastructure has historically outperformed in inflationary environments
At December 31, 2021. Source: Barclays, Bloomberg, Dow Jones, FTSE, S&P, Refinitiv Datastream, Cohen & Steers.
Past performance is no guarantee of future results. (a) Represents common period of available asset class returns. Rising inflation measured as a positive difference between the year-over-year realized inflation rate and the lagged 1-year inflation rate. (b) Unexpected inflation data begins in 1978. Inflation measured by the year-over-year change in the Consumer Price Index for all urban consumers, published by the U.S. Bureau of Labor Statistics. Unexpected inflation measured as a positive difference between the year-over-year realized inflation rate and lagged 1-year-ahead expected inflation, as measured by the University of Michigan survey of 1-year-ahead inflation expectations. 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. See end notes for index associations, definitions and additional disclosures.
This favorable inflation sensitivity derives from structural factors found within the various subsectors, as shown in Exhibit 3.
Inflation-linked revenues have provided built-in protections
At December 31, 2021. Source: Cohen & Steers
While investors may now be more willing to pay a premium to receive some inflation protection, infrastructure stocks actually ended 2021 trading at attractive valuations compared with stocks.
Values appear compelling looking at the spread or difference in share price multiples (Exhibit 4). On an enterprise value-to-cash flow multiple basis, listed infrastructure ended 2021 trading roughly in line with global equities—in sharp contrast to the asset class’s historical premium valuation. Any reversion to the average would imply a period of outperformance for infrastructure stocks.
Global infrastructure versus global equities
Current valuation spread is below long-term average
At December 31, 2021. Source: MSCI, FTSE and FactSet.
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 investors will experience the type of performance reflected above.
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. EV/EBITDA refers to the ratio of enterprise value to earnings before interest, taxes, depreciation, and amortization using current fiscal year estimates
And because of the repeated and unprecedented disinflation surprises of the 2010s, which negatively affected returns for infrastructure and other real assets, valuations are historically attractive relative to equities.
Infrastructure is trading near 20-year lows relative to stocks
At December 31, 2021. Source: Bloomberg, S&P Xpressfeed, Cohen & Steers proprietary analysis.
Past performance is no guarantee of future results. Valuation scores represent composites of various metrics: cashflow-to-price, dividend yield and book-to-price; based on proprietary Cohen & Steers data for infrastructure universe, constructed from the S&P Global Xpressfeed database. Global equities represented by MSCI World Index. 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 investors will experience the type of performance reflected above. 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 index definitions and additional disclosures.
Any return of an inflationary regime could imply improved relative performance for real assets classes such as infrastructure.
These historically attractive valuations occur at a time, we believe, when infrastructure is well positioned to benefit from continued healthy economic conditions and strong inflation protections. Longer term, secular trends such as the digital transformation of economies and the transition to clean energy will potentially be significant drivers of infrastructure returns.
Positioning: A balanced sector approach
Heading into the new year, we are seeking to maintain a balanced portfolio, with a cyclical orientation complemented by more-defensive assets. We are keeping a close eye on the path of new virus variants and their potential impact on global economic activity.
- Freight rails: We favor North American freight rails, where demand and corresponding volume growth remain strong, driven by heightened e-commerce use, inventory restocking, and onshoring of industrial activity. Demand remains robust and supply chain issues are gradually being alleviated. With rails now trading below the S&P on relative price-to-earnings ratios, we see a nice set up forming for rails in 2022, with the potential for increased earnings as well as P/E multiple expansion.
- Midstream Energy: Our outlook in 2022 remains supportive for the sector. In addition to what we see as an attractive macro backdrop and commodity price environment, the midstream space has benefited from markedly improved balance sheets in the last several years. We believe midstream has gone “back to the basics” and currently offers an attractive and well covered distribution, and should benefit from increasing cash returns to shareholders over time.
- Electric Utilities: While we continue to favor electric utilities with renewables exposure, we are cautious toward the sector broadly, as economies continue to strengthen on the cyclical recovery and as central banks embark on policy normalization. This is an environment where defensive sectors, such as utilities, tend to lag, as was the case in 2021. With expectations that interest rates will slowly grind higher, we are comfortable maintaining this stance.
- Toll Roads: The subsector remains vulnerable to near- term mobility restrictions as a result of virus variant developments; however, we anticipate the outlook for toll roads to improve as the year progresses, and as passengers opt for vehicle travel over mass-transit options in select regions.
As a group, we believe global infrastructure stocks are well positioned going forward to deliver potentially attractive relative returns, given attractive valuations, elevated inflation concerns and the appeal of relatively stable cash flows in what could be bumpy markets in 2022.
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Index definitions / 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: FTSE Developed Core Infrastructure 50/50 Index, a market-capitalization-weighted index of infrastructure and infrastructure-related securities in worldwide developed markets; constituent weights are adjusted semi-annually according to three broad industry sectors: 50% utilities, 30% transportation, and a 20% mix of other sectors, including pipelines, satellites, and telecommunication towers. Exhibit 1: 50/50 Blend of Datastream World Pipelines and Datastream World Gas, Water and Multi-Utilities through July 2008; Dow Jones Brookfield Global Infrastructure Index thereafter. The Dow Jones Brookfield Global Infrastructure Index is a float-adjusted market-capitalization-weighted index that measures performance of globally domiciled companies that derive more than 70% of their cash flows from infrastructure lines of business. Global equities: MSCI World Index, a free-float-adjusted index that measures the performance of large- and mid-capitalization companies representing developed- market countries and is net of dividend withholding taxes. U.S. Treasuries: ICE BofA U.S. 7-10 Year Treasury Index is composed of U.S. Treasury Notes with a 7-10-year maturity.
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 historical trend illustrated herein 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 made in this document will be realized. The views and opinions presented in this document are as of the date of publication and are subject to change without notice. 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. This material is not being provided in a fiduciary capacity and is not intended to recommend any investment policy or investment strategy or to account for the specific objectives or circumstances of any investor. We consider the information to be accurate, but we do not
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Risks of investing in global infrastructure securities. 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 fluctuation and lower liquidity. Some global securities may represent small and medium-sized companies, which may be more susceptible to price volatility than larger companies. No representation or warranty is made as to the efficacy of any particular strategy or fund or to the actual returns that may be achieved.
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