Shopkeepers are switching their signs back to ‘open’, restaurant tables are being dusted off, families are planning last-minute summer holidays and businesses are busy putting safety measures in place to avoid the spread of Covid-19. 
In short, the world is emerging from its lockdown shell and adapting to a post-pandemic way of operating – but governments are painfully aware of the need to kickstart economies after months of frozen business activity across many sectors.
The OECD has highlighted that the path to economic recovery remains incredibly uncertain and that growth prospects depend on multiple factors, including how the virus evolves, the duration of any shutdowns and the implementation of fiscal and monetary policy support.
Governments have announced significant fiscal stimulus packages in response to the coronavirus outbreak, many of which feature higher spending on infrastructure. This dynamic could drive strong performance for listed infrastructure as an asset class, with a focus on ensuring a ‘green’ recovery centred around renewables, clean transport, energy efficiency and a circular economy.
Bouncing back
It goes without saying that March was a difficult month for markets on the whole due to the spread of Covid-19. Areas that were especially affected within listed infrastructure included the transportation and energy infrastructure sectors. The supply shock sparked by the Organization of the Petroleum Exporting Countries (OPEC) coincided with a plummeting demand for energy products due to economies shutting down – with airports and other transportation assets grinding to a halt.
Dividends from businesses in certain sectors, such as the airport industry, have been put under pressure in the short-term, as some suspended their payments. However, many remain attractive from a long-term perspective, with commitments to reinstate their dividends as soon as possible.
Infrastructure businesses tend to bounce back quickly relative to the broader market. On top of that, active asset managers have had the opportunity to make some well-timed purchases and additions to exposure in select businesses during April and May.
In a period of economic uncertainty where dividends are under pressure across the market, utilities sector earnings have been a bastion of strength. Many utilities companies are not only defensive, but also acting as reliable income generators. This area of investment was therefore a key area of focus for M&G’s Global Listed Infrastructure fund. We capitalised on relative value in the sector by buying four new utilities holdings – including NextEra Energy Partners in the US, A2A in Italy, UK-based Contour Global and Hong Kong-listed China Gas Holdings. We had been tracking these companies for some time, but the valuations were out of reach until the recent market downturn. All four stocks have added value since purchase, with share price gains of 30 per cent or more.
Fiscal expansion provides a favourable backdrop
Importantly, infrastructure is expanding rapidly beyond the traditional realm of utilities, energy pipelines and transport – sectors commonly known as ‘economic’ infrastructure. It’s crucial to have a balanced portfolio of ‘social’ and ‘evolving’ infrastructure too. The latter includes communications and transactional infrastructure, as well as royalty companies – all of which inject a new dimension to an asset class more commonly associated with stability.
‘Evolving’ infrastructure has stepped into the spotlight during the global lockdown, given the obvious need for digital infrastructure such as broadband or data centres. But this trend is not just about lockdown – it is a structural growth opportunity.
It may take some time for the wider economy to rebound. Governments around the world have launched initiatives to fuel an economic recovery, and much of this is built around infrastructure spending. This fiscal expansion could provide a favourable backdrop for listed infrastructure.
There is already some anecdotal evidence to support this emerging theme. In the US, the New Jersey Turnpike Authority announced a 36 per cent toll hike to help fund $24bn in capital projects for its highways over the next 15 to 20 years. In an election year, where the need for infrastructure spending is one of the few areas that Republicans and Democrats agree upon, it will be interesting to see whether there are similar developments throughout the country.
In Europe, the Spanish government is mulling the further privatisation of motorways under the toll road model to ensure their longevity and maintenance in light of strained government finances. And infrastructure contracts have been awarded to companies such as Vinci, which the M&G Global Listed Infrastructure fund invests in, for a project associated with the public transit system in Paris. These fiscal initiatives on a country by country basis are of paramount importance for the listed infrastructure asset class.
Renewables take centre stage
It will not come as a surprise that fiscal expansion and economic recovery in many countries is centred around renewables. Europe’s economic rescue package stood out for its green agenda, with the issue of sustainability central to the recovery plan. In May, the European Commission proposed a package to help the EU tackle the repercussions of the Covid-19 crisis. The plan, known as Next Generation EU, has a clear policy of promoting renewable energy and clean transport, as well as the renovation and efficiency of infrastructure and buildings to support a more circular economy.
Digital infrastructure is also receiving more investment as Europe strives to boost connectivity – putting rapid deployment of 5G networks high up the priority list. Germany’s recovery proposal followed a similar vein, with the country earmarking €50bn for digitalisation, innovation and climate change. Businesses exposed to these structural growth trends can prosper to the benefit of stakeholders, which include employees, shareholders and broader society.
Fiscal stimulus is likely to remain topical until the global economy is on a firmer footing, but it’s also crucial not to lose sight of the fact that listed infrastructure is an asset class that’s driven by powerful, multi-decade trends which are likely to become more enduring. One of the most prominent long-term themes is renewable energy. Examples of companies operating in this area including NextEra Energy, a US-based renewable energy generator, and Ørsted, the world leader in offshore wind.
Other dominant themes include transportation of the future, urbanisation, universal connectivity, water and waste management and social and demographic shifts. These thematic tailwinds are likely to persist for many decades to come – creating some exciting opportunities for investors.
Alex Araujo is fund manager of M&G Global Listed Infrastructure. The views expressed above are his own and should not be taken as investment advice.