Following a year of strong relative performance for global listed infrastructure in 2022, infrastructure underperformed in 2023 in a stock market powered by a handful of technology names. Stronger than expected global growth and falling inflation softened the appeal of infrastructure’s more defensive qualities, which investors are discounting in the current macroeconomic environment, in our view.
We believe there continues to be a lot of macro uncertainty and that equity valuations in many cases have yet to reflect this. That said, we believe it’s an exciting time for investors to be allocated to global listed infrastructure based on three factors that stand to benefit the asset class over time.
Attractive Performance Characteristics in Uncertain Macro Backdrops
Infrastructure has a long history of resilience and relative outperformance in periods of equity market volatility—in particular, outperforming in nearly all market declines of greater than 5% since 2007.
The asset class has similarly delivered strong relative returns during periods of higher-than-expected inflation compared to stocks and bonds. Furthermore, infrastructure has historically outperformed the broad global equity market in three of four phases of the business cycle: the late cycle characterized by overheating economic conditions, recessions and early cycle recoveries. This is partly due to inelastic demand and the essential public nature of infrastructure businesses, making cash flows predictable and less volatile in all economic environments.
Based on infrastructure’s underperformance in 2023, the asset class is seeing its most attractive relative valuations since the Global Financial Crisis. The impact of higher rates feels heavily reflected in infrastructure valuations today while global equities have yet to reflect broader macro uncertainty. While we believe that the selloff in infrastructure stocks was overdone, it led to unique investment opportunities at discounted valuations, particularly for active managers who are able to take advantage of these types of market dislocations.
Global listed infrastructure can be an attractive allocation as it has little overlap with broad equity exposures, accounting for just 4% of the MSCI World Index. The asset class provides access to subsectors and investment themes that are typically under-represented in broad equity market allocations, such as transportation or cell towers, while also providing geographic diversification. The liquidity of a listed allocation can also be used to quickly capitalize on dislocations that occur in the market. As such, a listed infrastructure portfolio can offer exposure across a wide range of sectors, geographic regions and market capitalizations.
Infrastructure is also well-positioned to benefit from the movement toward clean energy. Increasing policy and economic support for these initiatives, such as the Inflation Reduction Act, has provided a substantial tailwind for related businesses in the infrastructure universe, such as utilities and pure play producers of solar and wind energy.
However, we believe that traditional energy needs to continue playing a role in satisfying energy demand along with alternative energy for the foreseeable future. As such, the “Energy Addition,” as we have come to call it, is resulting in compelling investment opportunities in subsectors such as midstream energy, where companies play a key role in processing, transporting and storing energy commodities such as natural gas.
There are also other important investment themes and opportunities emerging in the infrastructure universe, including but not limited to the broad modernization of infrastructure following decades of historical underinvestment; digital transformation of economies supported by new themes such as AI driving exponential increases in data demand which benefits data centers and cell towers; and increased supply chain support from transportation sectors such as freight rails and marine ports.
The Appeal of a Long-Term Allocation
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. As we head into and move through 2024, we believe global growth will remain well below trend. Interest rates are likely to remain elevated, but are certainly much closer to peaking than troughing, and inflation, while falling, is likely to remain above trend with the possibility of bouts of higher inflation resurfacing. Against this backdrop, we believe listed infrastructure is an attractive allocation for portfolios that may benefit investors in the long run.
Ben Morton is head of global infrastructure for Cohen & Steers.
