Infrastructure set to rebound after rough year

After underperforming in 2020, infrastructure is particularly attractive this year as a predictable, inflation-linked investment, a Brookfield Asset Management portfolio manager says.

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“Infrastructure was in the bull’s-eye of the Covid-19 lockdowns,” said Larry Antonatos, managing director and portfolio manager with Brookfield Asset Management’s Public Securities Group in Chicago, in an interview last month. “Both economic activity and mobility declined dramatically.”

In stark contrast to broad equities, benchmark returns for public infrastructure equities were negative in 2020. The FTSE Global Core Infrastructure 50/50 index, for example, had a negative total return of 3.3% last year.

However, with wide dispersion of returns, two infrastructure sectors delivered positive performance: communications and water. The former benefited from increased demand for mobile service and streaming as people stayed home, and the latter has low economic sensitivity, Antonatos said.

“All other infrastructure sectors delivered negative performance in 2020, with mobility-sensitive transportation sectors — which are airports, seaports and toll roads — lagging, and the economically sensitive oil and gas pipeline sector bringing up the rear,” he said.

In the fourth quarter, positive vaccine news boosted transportation and oil and gas, and the relative underperformance in infrastructure overall offers a “compelling” value opportunity, Antonatos said.

“Infrastructure equities have never been cheaper relative to broad equities,” he said, citing such metrics as enterprise value to earnings before interest, taxes, depreciation and amortization; price-to-earnings; and dividend yield.

“This creates a very attractive short-term buying opportunity.”

Over the longer term, three key growth opportunities within infrastructure provide the sector with a bright outlook.

First is the transition to renewable energy. U.S. President Joe Biden campaigned on creating a clean energy economy by 2035, and U.S. stimulus during Covid-19 has included incentives such as extensions for solar and wind production tax credits.

“Over the next 30 years, we anticipate $25 billion of investment in renewable generation, as renewables grow to become the majority of electricity generation,” Antonatos said.

“In addition, we anticipate $75 billion of investment in transmission, distribution and storage to modernize the electricity grid to embrace renewables.”

With many traditional electric utilities beginning to replace coal with gas and renewable energy, investors can access renewables through well-known companies as well as renewable specialists, he said.

The second growth opportunity is within communications infrastructure.

“Mobile data usage increased 14% in calendar year 2020, driven in part by Covid-19 lockdowns,” Antonatos said. “While this high rate of growth is an anomaly, we anticipate strong long-term growth in data usage for many years.”

Third, aging transportation infrastructure in developed markets will be modernized increasingly through public-private partnerships, offering an opportunity for investors, he said.

Overall, “The combination of discounted valuation and long-term growth makes infrastructure a compelling investment opportunity,” Antonatos said.

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