Julius Baer: Economic stimulus, solid results lift infrastructure firms

For equity investors, we believe that it makes sense to focus on owners and operators of essential infrastructure facilities such as electricity, water supply and waste disposal, as well as oil and gas pipelines, railways, shipping ports and airports.

The performance of such firms tends to be driven by monopoly-like market positions, income streams secured over the long term by regulatory or contractual means, partial protection against inflation and largely inelastic demand due to the nature of the services.

These advantages remain intact even when economic times are hard. Numerous companies globally have posted surprisingly stable operating results in recent months. Until February this year, however, most infrastructure firms’ share prices suffered downward corrections more or less in line with the overall market. This has left a lot of stocks at attractive valuation levels.

The fact that many governments have put together stimulus packages to boost their national economies should lead to a widespread recovery in infrastructure share prices. A considerable portion of the investment is to flow into infrastructure projects that are likely to be handled by established operators.

The proportion to be spent on infrastructure is especially large in the US and China. In the US, for example, almost two thirds of the $787bn economic package passed in February is earmarked for infrastructure investments. These will focus on highways and bridges in urgent need of renovation and on modernising schools and hospitals.

While most of these huge spending efforts will not take effect until 2010, they can cushion the impact of the recession and open up new opportunities. Rapidly rising public debt levels are leading to increased privatisation pressure in many countries, which could create further opportunities for infrastructure firms over the medium term. In fact, the government stimulus packages fall a long way short of covering the actual need for infrastructure investment worldwide. The World Bank estimates that investments of roughly $1.6trn will be needed over the next five years in the US alone. The Organisation for Economic Cooperation and Development (OECD), meanwhile, is calling for further infrastructure programmes, and fast.

We can therefore conclude that the sector’s mostly weak share price performance stands in contrast to its relatively robust and stable operating results and to the growth prospects of many infrastructure firms.

Dirk Kubisch is product specialist equities for Julius Baer Asset Management. The views expressed here is his own.