The macroeconomic outlook will have no detrimental effects on the infrastructure sector, with three key themes driving the market in 2018, according to RARE Infrastructure.
“We are expecting a stable operating environment, but recognise that any deviation from expectations could cause an outsized movement in asset prices,” RARE co-chief executive and co-chief investment officer Nick Langley said today.
“While there may be volatility, RARE does not expect any major corrections as there is still significant cash on the sidelines waiting to ‘buy the dips’.
“In short, we expect continued growth in usage/patronage for infrastructure companies, but expect pressure on achieved prices, impacting revenues.”
Langley said as long as strong underlying economic growth continued, there would be an ongoing increase in revenue and cash-flow growth, which would be supportive of earnings and dividend growth.
While the specialist manager is fully invested, in 2017 it increased the defensive positioning of strategies.
“We are seeking a balance between the more defensive regulated utility companies with higher growth infrastructure companies, such as rail companies, toll roads and airports,” Langley said.
He noted three key themes that will drive the market this year.
“The first is asset-based growth: companies investing in their underlying assets to generate future returns, rather than buying or building new assets,” he said.
“Most of the companies RARE invests in are achieving between 7 per cent and 10 per cent return on equity, which in turn is being invested into the company’s existing assets.
“The second is price elasticity of demand. We believe that, as companies need to be careful not to increase prices beyond the consumer’s willingness to pay.
“For instance, toll roads that increase rates beyond a certain level can quickly find revenues impacted by motorists taking alternative routes.”
Third, and arguably the theme with the greatest potential to change markets, is technological disruption, he said.
“Investors are starting to consider, and be wary of, the impacts of changes in technology on the way we utilise our infrastructure, and there may be some winners and losers out of that,” he noted.
“Some examples of disruptors within the infrastructure sector include the falling cost of battery energy storage, greater penetration of renewable power generation, increased interconnection of electricity networks, and the greater prevalence of electric vehicles.”