Listed infrastructure – There is life after rate rises!

Jim Wright

Premier Miton Global Infrastructure Income Fund

When it comes to discussions surrounding the nature of listed infrastructure, the most prominent and recurring debates that we’ve had with clients over the years would include the following topics:

  • Are these stocks simply bond proxies?
  • Have infrastructure equities performed well simply because of an era of cheap money?
  • Does this trend come to an end with the inflexion in the rate cycle and the end of this era in financial markets?


These are very good questions. Many of our clients have held a broad portfolio of infrastructure funds and investment trusts in an “alternative income” allocation. So, now that so-called risk-free rates are structurally higher, what’s the point in taking this extra risk? If infrastructure stocks generally have higher levels of debt than the wider market, surely they are more vulnerable to rate rises and higher costs of debt leading to depressed earnings?

Fortunately, there is an answer to all of these questions which provides a rationale for owning infrastructure stocks, and even adding into recent weakness, and it is a straightforward narrative which can be summed up in one word – growth. Growth is not ubiquitous across the sector, and the value of stock and investment trust selection will never be as important as it is now. However, we can see the potential for growth, both in returns on and utilisation of existing assets, and in investing in assets for the future, which will drive returns for our stocks, even with a challenging macroeconomic backdrop.

Where does this growth come from? Firstly, it comes directly from elevated rates of inflation across the globe. For many utility networks, renewable generation assets, telecom towers, energy pipelines and other infrastructure assets, returns are either regulated or based on long-term contracts and are explicitly linked to prevailing inflation rates. Therefore, if interest rates rise in response to higher inflation, the returns on these infrastructure assets will also increase. Also, for many regulated stocks, the regulator will also allow higher returns to compensate for rising debt costs, augmenting this inflation linkage.

Secondly, and more importantly, many listed infrastructure companies are absolutely crucial to driving the energy transition – the move away from fossil fuels to renewable electricity generation, the electrification of transportation and the growth of alternative fuels such as hydrogen and of technologies such as carbon capture and storage. The drive for energy security, lower and less volatile prices and overall emissions reduction has intensified through 2022 with the Inflation Recovery Act in the USA and the RePower EU targets in Europe emblematic of the determination to support and accelerate the energy transition. We believe that the secure, visible, long-term, and sustainable growth that utilities and green energy developers can achieve could translate into a very positive dynamic for earnings and dividends, looking out through the next decade and beyond.

The danger in a rising interest rate environment is that investors can be stuck with fixed return assets, where those returns become steadily less attractive as they are eroded in real terms. These assets exist in the listed infrastructure space, and it is our job as active managers to avoid them and instead focus on assets where there is potential to grow returns and provide an attractive asset class for investors in a turbulent financial world.

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Risks

The value of investments may fluctuate which will cause fund prices to fall as well as rise and investors may not get back the original amount invested.

Higher inflation can lead to some investments falling in value, particularly those with a fixed level of interest, for example government bonds and corporate bonds.

Infrastructure investments are often in large-scale projects whose profitability can be affected by supply problems or rising prices for raw materials or natural resources. Changes in the wider economy and government regulation can also have a significant influence.

Forecasts are not reliable indicators of future returns.

IMPORTANT INFORMATION:

For Investment Professionals only. No other persons should rely on any information contained in this document.

Whilst every effort has been made to ensure the accuracy of the information contained within this document, we regret that we cannot accept responsibility for any omissions or errors. The information given and opinions expressed are subject to change and should not be interpreted as investment advice. Reference to any particular stock or investment does not constitute a recommendation to buy or sell the stock / investment.

Persons who do not have professional experience in matters relating to investments should not rely on the content of this document.

For your protection, calls may be monitored and recorded for training and quality assurance purposes.

 

Issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227.  Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

 

007714/300922

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This section of the website and the content it contains is for retail clients only and by persons who are resident in the United Kingdom [who are not US persons]. Professional advisers should refer to the Professional Advisers site.

The content of the pages of this website is for your general information only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

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The information contained on this website does not constitute an offer or solicitation to sell or purchase shares in the funds or portfolios or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

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The content of the pages of this website is for your general information and use only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

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