Investors in the Asia-Pacific region gathered virtually for our 2020 II Asia Summit last week, participating in panel discussions, roundtables and networking. Here are five key takeaways that emerged from the week-long event:
Covid-19 proved diversification works
Jordan Kraiten, head of infrastructure at A$49 billion Australian superannuation fund Hostplus, told the conference that the single greatest lesson he’s learned from the crisis is that diversification really does work.
“While we all run stress tests across our portfolio and on individual assets, I’m not sure anyone ran the covid test – and even if they did, I’m not sure they could have run a test that mimicked what we saw, with international and state borders shutting down. It was done in such an emphatic and quick way that I don’t think any stress test would have prepared you for it,” he said.
As you’d expect, Hostplus found that its GDP-linked assets like airports and seaports were hit hardest, while regulated assets or those with long-term contracts fared better.
“In some cases, like in the midstream world where assets contain a lot of storage, there was quite a positive result from covid from a market dislocation perspective,” he said.
“So, [it proved] diversification works,” he said.
Technology has enabled due diligence to continue, but it has only worked well with existing partnerships, Asian Infrastructure Investment Bank senior investment officer Thomas Walenta said.
“We’ve executed due diligence well, but I have to say it’s been done successfully because we had personal relationships with managers already – doing operational and investment due diligence remotely is easier [that way] than if you were starting with new managers that you haven’t already met,” he said.
Walenta also said that virtual meetings can offer unusual insight into people’s lives – but that it’s no replacement for in-person meetings.
“These virtual conferences allow you to get into the private sphere of your partners – you’re invited into their homes and there’s another element of getting to know someone. But it’s not a good substitute for personal interaction and we still have to figure out how we can work with first-time managers.”
APAC aviation has hope – but a long way to go
Airports have been one of the most obviously hard-hit asset types during the pandemic, but there are signs of hope in regions where the virus has been handled relatively well – including parts of the Asia-Pacific.
James Fraser-Smith, head of unlisted infrastructure at Australia’s Future Fund, which is an investor in Melbourne Airport, said that there appears to be “strong pent-up demand” for domestic travel among Australians who have been unable to make overseas trips for months.
He pointed out that APAC airports have outperformed their peers on listed markets in recent months, with signs that China’s air passenger levels have almost recovered to 2019 levels already.
Many APAC airports had ambitious and expensive capital expenditure plans prior to the pandemic, and should vaccines lead to a rapid recovery in traffic volumes, those could be restarted quickly, Fraser-Smith said.
“But it’s very hard to commit to material capex before you have certainty of being able to recover that through passenger growth,” he said.
“Before the recovery phase of international travel can begin in earnest, two key issues need to be resolved, which are inextricably linked: these are the distribution of a vaccine, and governments re-opening international borders without quarantine requirements. Both of those are out of the control of the aviation sector.”
So, uncertainty prevails in aviation, with forecasts suggesting that passenger numbers worldwide will not recover to 2019 levels until 2024.
Don’t focus on rainbows and unicorns
There were warnings at the Summit that Asia may not see a dramatic recovery in green investment after the pandemic subsides. Alexandra Tracy, president of Hoi Ping Ventures, said it would be hopeful to assume that “everything will be brought back better and everything will be green from now on” – especially in Asian emerging markets.
Tracy said that even before the virus, South-East Asia was not on track to meet its renewable energy targets, according to the International Energy Agency’s Southeast Asia Energy Outlook 2019, which found that only 15 percent of the region’s energy is provided by renewable sources.
“There are some efforts by some governments in the region [to make green investments] but look at what they’re facing. They’re scrambling to tackle the economic devastation that’s been wrought by the policy response to the virus, so it’s not unreasonable that some short-term measures will be taken, rather than some of these longer-term aspirations,” she said.
“It’s hardly the time, for example, for rolling back dramatically all of the fossil fuel subsidies that we have in this part of the world that really are an impediment to investing in greener infrastructure,” she said.
“I just don’t think we should get carried away with the rainbows and unicorns. I think investors need to be realistic and really see where they’re looking [at].”
Perceived vs real risk
Returning to a theme we have heard at previous Asia Summits, Aditya Aggarwal, India partner at Global Infrastructure Partners said the level of perceived risk in many emerging markets – notwithstanding particular geographies where there are elevated levels of political or currency risk – was somewhat “overblown”.
“Especially on the regulatory or construction side of projects, we don’t see a great deal of difference between some emerging markets and the more developed economies,” he said.
“Especially in the renewables space or even toll roads, we’ve seen some regulatory actions, whether it’s in the UK, Spain or France, where there has been some roll back or conversations around having another look at concession agreements or contracts that were signed in the past.”
From that perspective, Aggarwal argued, emerging market economies should not necessarily be viewed as riskier – in fact, some of those ‘safe’ regulated assets in developed economies have demonstrated that they are just as likely to be subjected to the whims of regulators and governments when it comes to determining their allowed return levels.