5 min read 19 May 21
The global economy is showing early signs of a recovery and many investors are starting to think about a world beyond COVID-19, where the outcome of significant fiscal stimulus could be the return of inflation. How would listed infrastructure fare against a backdrop of higher bond yields and rising interest rate expectations?
While listed infrastructure has historically shown a degree of sensitivity to movements in the bond markets in the short term, we expect the long-term effects for our growth-focused strategy to be considerably different. We welcome inflation. We welcome a world of controlled economic growth with gently rising inflation. We believe this provides many listed infrastructure companies, whether directly or indirectly, with a vital source of growth. Inflation-linked revenue is a key feature of the asset class and a key driver of the growing cashflows and dividends we seek.
However, inflation is not the only source of growth. Listed infrastructure is a beneficiary of long-term structural trends, such as renewable energy, digital connectivity and demographics – powerful themes that we believe will endure for many decades to come.
Our approach to listed infrastructure focuses on physical assets. We invest in businesses owning or controlling critical infrastructure, long-life concessions and perpetual royalties. We have divided the asset class into three different classes of infrastructure: ‘economic infrastructure’ (utilities, energy and transport); ‘social infrastructure’ (health, education and civic); and ‘evolving infrastructure’ (communication, transactional and royalty).
The fund holds a small number of investments, and therefore a fall in the value of a single investment may have a greater impact than if it held a larger number of investments.
The exposure to structural growth is most apparent in the fund’s ‘evolving’ category of infrastructure, which includes communications assets such as data centres and satellites and transactional infrastructure like payments networks.
The importance of digital infrastructure came to the fore during lockdown as millions of people around the world were forced to work remotely and entertain themselves at home. However, there are other long-term themes at play ‒ namely the proliferation of data in our increasingly digital world. Transactional infrastructure continues to benefit from the structural growth in payment networks. The long-term shift away from cash transactions to digital and card payments has not only remained intact during lockdown, but may even accelerate due to changes in consumer behaviour.
At present, there is growing optimism that the global economy will make a robust recovery from the COVID-19 pandemic. However, some investors have expressed concern that rapid economic growth might result in the return of inflation, particularly given the prospect of significant fiscal stimulus in the US, and also lead policymakers to raise interest rates sooner than expected. Although the Federal Reserve has stated that it expects higher prices to be short-lived and it is not planning to change its policy for some time, these worries arguably lie behind the recent spike in US Treasury bond yields.
The fund can be exposed to different currencies. Movements in currency exchange rates may adversely affect the value of your investment. Investing in emerging markets involves a greater risk of loss due to greater political, tax, economic, foreign exchange, liquidity and regulatory risks, among other factors. There may be difficulties in buying, selling, safekeeping or valuing investments in such countries.
While we recognise that higher interest rates could represent a challenge to certain listed infrastructure businesses as it makes the income they offer less attractive to investors, we believe that in certain scenarios the asset class could also thrive. In particular, we think that our focus on physical assets and long-term growth could benefit from a buoyant economy and modest inflation.
In our view, rising rates could be positive for infrastructure companies, for perfectly logical reasons: interest rates are raised because economic activity and inflation are on the rise, which means more traffic through toll roads and more passengers at airports, as well as more cashflows from inflation-linked revenues.
The fund invests mainly in company shares and is therefore likely to experience larger price fluctuations than funds that invest in bonds and/or cash.
We think the impact of rising bond yields could be very different for a strategy focused on delivering a high yield without prioritising growth. While bond proxies are likely to suffer in an environment of rising rates, our approach is designed to benefit from inflation, due to our resolute focus on long-term growth.
Further details of the risks that apply to the fund can be found in the fund's Prospectus.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.