Infrastructure holds an important place in the fabric of modern society, providing essential services for our daily lives. It is a beneficiary of long-term growth trends, such as the transition to renewable energy or the proliferation of data in our increasingly digital world – powerful tailwinds which are likely to persist for many decades to come. In the midst of unprecedented economic uncertainty related to the coronavirus, this is even more important.
Listed infrastructure was certainly not immune to the coronavirus-related market downturn in March. Nevertheless, the extraordinary circumstances created attractive buying opportunities for long-life global infrastructure assets, which form the backbone of modern society.
Impact of coronavirus
For many of us having to stay at home for extended periods of time, electricity, water, natural gas and other utilities are providing for life’s essentials. Communications infrastructure with the shift to mass homeworking and the importance of connectivity through data centres, broadband networks and mobile towers has proved resilient and has become an important lifeline to family, friends, and colleagues, while providing a conduit for our in-home entertainment.
Not all aspects of the listed infrastructure asset class have gone untouched, however. With global lockdowns and restrictions on travel, transportation infrastructure assets (such as airports, rail networks, and toll roads) have been severely impacted. Additionally, the dual shock of an OPEC supply increase and the Covid-19 related collapse in oil and gas demand has negatively impacted energy infrastructure businesses.
While the current global health crisis is unique, we have learned from past crises that volatility brings opportunity. This is a time for active management to take centre stage and capitalise on extreme dislocations in the stock market. In addition to growth, valuation is a crucial aspect of the stock selection process. We strongly believe that company fundamentals are reflected in share prices over time and that the indiscriminate selling in the recent downturn has left some high-quality infrastructure businesses trading on attractive multiples. While our fund is typically managed as a low turnover, buy-and-hold strategy, the current circumstances are far from normal, so we have been opportunistic in the volatile markets.
We capitalised on the relative value opportunities in utilities – which we expect to maintain and grow their dividends. One new holding is an Italian multi-utility business exposed to Northern Italy, saw its shares come under significant pressure on short-term concerns and negative sentiment. Our confidence in the long-term value and prospects for the business are unshaken.
Listed infrastructure recovered much more quickly than the broader market in the immediate aftermath of the 2008 global financial crisis. Its consistent revenues and cashflows are conducive to a swift recovery in share prices when normal market conditions are restored.
While there is understandably a lot of focus on the short-term during the current crisis, it is crucial that we do not lose sight of the long-term perspective that this asset class requires.
As long-term investors, we are strong advocates of assessing ESG factors as an integral part of the investment process, ensuring that the assets we are investing in are sustainable and commercially viable over the long term. Unless the assets are sustainable, businesses cannot generate sustainable and growing cashflows which ultimately fuel the rising dividends we seek. We take ESG seriously for financial reasons, not necessarily ethical reasons.
Since the Brexit referendum in 2016 and to protect the interest of its international clients, M&G has set up a new legal and corporate structure in Luxembourg. The Group has also developed a SICAV platform in the Grand Duchy which is the home for all its investment strategies for its international clients.