Global listed infrastructure not just bond proxy

By Sovereign yields around the world are climbing on the back of rising inflation expectations and recent political events, but higher interest rates do not correlate to lower returns for infrastructure stocks, according to an AMP Capital white paper.

The “Not Just a Bond Proxy” report revealed a rising yield environment caused market overreaction, which resulted in short-term underperformance of global listed infrastructure stocks compared to global equities.

However, it was an overreaction that belied the asset class’s true characteristics and the recovery that had followed every rate rise in the business cycle since the global financial crisis (GFC), the white paper said.

The new research found the average performance of listed infrastructure during periods of rising yields was 0.9 per cent compared to 10.3 per cent for global equities.

Listed infrastructure, however, recovered after each of these periods of rising yields, outperforming global equities by around 10 per cent during the following 12 months.

“Each meaningful increase in sovereign yields since the GFC, including the taper tantrum in 2013 and the bund tantrum in 2015, saw global listed infrastructure underperform global equities on a short-term basis before recovering all of that relative underperformance in the 12 months following,” AMP Capital head of global listed infrastructure Guiseppe Corona noted.

“What this shows is a market overreaction to a rising yields environment.

“A strong correlation between the performance of global listed infrastructure and its cash-flow growth shows investors should focus on the underlying assets and their ability to generate visible and growing cash flows, and not be spooked by the dramatics of short-term market moves.
“Furthermore, the impact of rising yields should also be taken in the context of listed infrastructure’s sector diversification.”

Corona added sectors such as utilities, communication, transport, and oil and gas storage transportation were not affected by changes to interest rates in the same way, thus investors could mitigate risk arising from macro factors, such as interest rates.

The white paper emphasised the importance of differentiating between the short-term volatility of equity prices and the long-term stability of cash flows.

“Investors should always focus on the underlying assets and their ability to generate visible and growing cash flows because of the strong correlation between the long-term performance of the asset class and its cash-flow growth,” Corona said.

“Having said that, volatility that comes with short-term increases in interest rates can present a buying opportunity for savvy investors to capitalise on the dislocation between value and price.”

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