Jim Wright, manager of the Premier Miton Global Infrastructure Income Fund, makes the case for listed infrastructure investing, citing 5 key themes that he believes will help to drive the sector forward.
North American energy infrastructure – the game has changed
It is no exaggeration to say that Russia’s invasion of Ukraine in February 2022 has completely changed the energy landscape in Europe, and in addition, has profound implications on the source and supply of energy globally.
In March 2022, the European Commission launched the REPowerEU plan, aimed at reducing the EU’s reliance on Russian gas, which is currently 40% of overall consumption, by two-thirds by the end of 2022 and to zero “well before 2030”. The US government has made significant commitments for the supply of US liquified natural gas (LNG) to Europe, with President Biden announcing additional volumes in 2022 and beyond.
This increase in US LNG export demand, allied to a renewed focus on the security of supply of domestic oil and gas in the USA and Canada, has potentially very positive implications for investment in energy infrastructure. It provides a tailwind both for the utilisation of existing assets and for investment in new projects for the listed energy infrastructure companies. We expect to see significant growth from investments in LNG export facilities, pipeline networks and decarbonisation solutions such as carbon capture and storage. In turn this could drive growth in revenues, earnings, and dividends for companies such as Enbridge, Williams, and Sempra Energy.
Another major route which the EU Commission has identified to reduce reliance on Russian gas is the acceleration in renewable energy investment across Europe. At the launch of REPowerEU, the Commission President, Ursula von der Leyen, clearly stated the need to accelerate the buildout of renewables and hydrogen infrastructure alongside improved energy efficiency, as well as diversifying gas supplies. Policy moves to expedite the planning process and support mechanisms for renewables are likely to be deployed to meet the policy goal and will be necessary to drive a meaningful change in the trajectory of renewable development.
Equity markets have been somewhat sceptical regarding renewable energy developers in recent months based on concerns over supply chain issues, higher interest rates and the weight of money chasing new projects, all of which were perceived as a negative influence on returns on investment. We see the increased demand for renewables, as well as the higher “clearing price” set by gas-fired electricity generation, as offsetting these negatives, and we remain enthusiastic over the long-term prospects of stocks such as RWE, SSE and Orsted.
Infrastructure and inflation
One of the defining characteristics of infrastructure as an asset class is the large proportion of revenues which have some linkage to inflation. Many regulated assets, particularly in the utility sector, have profits which have direct linkage to local inflation rates as part of their returns formula. In addition, there are other infrastructure assets, such as pipelines and telecommunication towers, where users commit to long-term contracts with built-in annual escalators, again frequently linked to local inflation rates. And even in areas where contracts tend to be more short-term in nature, such as US rail freight, the asset owners often have the pricing power to pass through cost increases.
We believe that, in a period of sustained and rising inflationary pressures, infrastructure equities are extremely well-placed to mitigate the negative impacts of inflation on investor returns.
Growing private equity interest in listed renewables
The listed infrastructure sector has always attracted interest from buyers such as pension, sovereign wealth and private equity funds looking to invest in stable, long duration assets. We believe that this has accelerated more recently, as the attraction of “real asset” investments has increased, particularly as an alternative to bonds. We have noted an increasing number of transactions across regulated utilities, renewables, transport infrastructure and telecom towers and fibre networks in recent months, with private buyers acquiring assets from listed companies or making offers for the entire company, at considerable premium valuations compared with the prior stock price.
Good and growing income
Many infrastructure assets offer regulated income or long-term contracted revenues, providing good visibility and stability for investors seeking a regular flow of dividends. Allied to this, the listed infrastructure sector by nature provides exposure to growth themes such as the energy transition and the demand for high-speed data networks. Investment in these growth areas and increased returns on existing assets from higher utilisation and from inflation-linkage can combine to drive growth in dividends from the sector, increasing the attractiveness of the proposition for investors.