Is infrastructure immune to market volatility?
While infrastructure is not immune to market volatility, it can offer SMSF investors some in-built protection.
Volatile and uncertain markets are highlighting the value that infrastructure investment can bring to an investor’s portfolio. Infrastructure assets can offer SMSF investors a strongly differentiated set of characteristics compared to other asset classes. These characteristics may include:
- The provision of essential services;
- Significant barriers to entry and a generally dominant market position;
- Long duration assets, often with a life of 30+ years;
- High upfront costs, but low ongoing operational costs;
- Long-term, stable cash flows, generally with low volatility compared to other asset classes;
- Inflation-linked contracts and pricing that protects investors from the effects of inflation on long-term cash flows.
We spoke to Tim Humphreys, Head of Global Listed Infrastructure at AMP Capital about how listed infrastructure is performing against a volatile market backdrop.
Q: Tell us about the recent sharemarket volatility and how it’s impacted listed infrastructure?
We’re seeing considerable volatility in global markets fuelled by some significant economic events. Early in the month attention was focused on continued speculation on the timing of the US Federal Reserve raising interest rates, unresolved issues in regards to the Greek debt renegotiations and some geopolitical concerns around heightened tensions between North and South Korea. However, these concerns were eclipsed by unexpected and successive devaluations of the Chinese Renminbi, which sent reverberations throughout global markets. Against a weakened global economic outlook, commodity prices remained under pressure.
Although global listed infrastructure has not been immune to recent global market sentiment and movements, many of the infrastructure companies we invest in have in-built protection through transparent regulation or long-term contracts with high quality counterparties.
Q: What are some current and emerging trends?
The oil, gas storage and transportation sector was particularly weak during the September period, with low commodity prices weighing on sentiment for the whole energy sector. Whilst lower long-term oil prices may affect future projects in the oil market, over the short to medium-term, the midstream companies enjoy cash flows protected by their contracts. We also expect consolidation in the industry to continue, with acquisitions, divestitures and corporate restructures remaining attractive in such an environment. Warren Buffett’s Berkshire Hathaway recently disclosed a US$4.48 billion stake (approximately 10.8%) in oil refiner Phillips 66, which further highlights that significant value is emerging in the sector. Although current market conditions are negative from a short-term perspective, they continue to present opportunities for the disciplined and experienced investor to acquire or add to positions at favourable valuations.
Q: What’s your investment plan and outlook for the remainder of the year?
As we expect volatility to continue over the coming months, we remain convinced quality listed infrastructure companies retain compelling reasons for sustainable long-term investment. Typical qualities which support this approach include long-term contracts, regulated income, strong cash flows and stable yields. In addition, following extended periods of underinvestment in the asset class, much of the required investment is now imperative.
We continue to adopt a defensive growth investment strategy in the current environment and are initiating or adding to positions in quality companies that offer compelling entry values. Although the likelihood of a US Federal Reserve rate rise now looks more likely to occur in December 2015 or early 2016, we continue to rotate away from companies that will be negatively affected by rising interest rates.
We also continue to focus on quality companies and find attractive opportunities in the energy infrastructure sector in North America, which has seen indiscriminate selling over the last month, including high-quality companies that have cash flows underpinned by long-term contracts. We have also been looking for opportunities to add to our holdings in natural gas transportation companies, as these have also been sold off even though they are largely unaffected by falling oil prices.
We remain convinced the combination of a secular growth tailwind and above-average dividend yield highlights the benefits of investing in the infrastructure sector and we continue to search the globe for the highest quality companies that will deliver the best risk-adjusted opportunities for investors.
Find out more about investing in global listed infrastructure securities here.
About the author
Tim Humphreys is the head of AMP Capital’s Global Listed Infrastructure team, based in the Sydney office. He also leads the research effort of infrastructure companies in the Americas. Tim has over 15 years’ experience in the financial industry in the UK and Australia and is a skilled infrastructure analyst.