Infrastructure isn't just another type of equity. The asset class exhibits unique behavior –with unique potential for portfolio diversification.
Many investors assume that listed infrastructure companies, because they're publicly traded, must behave like any other stock. And it's true that, in the short term, listed infrastructure does tend to correlate more closely to the broader equity market than to direct infrastructure investments.
But don't be fooled. Listed infrastructure is still infrastructure, with its own risk/return profile and structural drivers distinct from those of stocks.
Not just another equity sub-sector
The confusion, I think, arises from a difference in time horizon. Over short time frames – days, months – equities and listed infrastructure tend to move alike. Over longer periods, however, listed infrastructure tends to revert to the patterns typical of its asset class.
Consider the fifteen years ending December 2018. Global listed infrastructure delivered higher returns than global equities as a whole, and even most stock sub-sectors -- and, notably, it did so with lower volatility.
Global Listed Infrastructure Relative Risk/Return
FTSE Global Core Infrastructure 50/50 Net TR Index GBP from Dec-05, previously Macquarie MSCI World Net TR GBP, as at 31 December 2018
Source: Bloomberg and First State Investments
Infrastructure's unique behavior makes intuitive sense, since these companies provide the essential services that consumers just can't go without, including highways, electric grids, water utilities, even sanitation. Demand for these services tends to be immune to economic cycle, while prices are often heavily regulated or set by contracts to possess a built-in inflation hedge. Thus, infrastructure as an asset class tends to be less affected by economic growth, or lack thereof.
What's more, infrastructure can also better weather both inflationary and deflationary pressures that would wreak havoc on other markets. Infrastructure companies possess such strong pricing power in their space that they can both raise prices to keep pace with inflation and hold them steady in deflationary markets, either way without sacrificing much in the way of customer demand. Yields in the space have historically ranged between 3% and 4% per annum, with mid-to-high single digit earnings growth – no matter what the stock market is doing.
Unique, big-picture growth drivers
In a macro sense, what drives growth in infrastructure is not the same as what drives growth in equities. Economic trajectory matters far less than structural, societal change.
Infrastructure is a big-picture asset, driven by big-picture ideas: society's increasing urbanisation, the globalisation of commerce, the fight against climate change – even the digital revolution. These themes are long-lived and persistent.
Infrastructure's most potent growth driver, however, will likely be a replacement story. From bridges to water systems, much of the world's infrastructure will need to be repaired and restored as it comes to the end of its projected lifetime. At the same time, capacity must be expanded and upgraded to handle the demands of the 21st century. Consider that:
