Listed infra not a bond proxy, says AMP

The Australian fund manager argues investors should differentiate between short-term price volatility and long-term cash flow growth of underlying assets.

Financial markets often overact to increases in sovereign yields as implied by the short-term volatility of listed infrastructure stocks, according to Australian fund manager AMP Capital.

In a white paper, the firm argues that the average performance of listed infrastructure during periods of rising yields is 0.9 percent, compared to 10.3 percent for global equities. However, listed infrastructure recovered after each of these periods of rising yields, outperforming global equities by around 10 percent during the following 12 months, AMP Capital noted.

Therefore, the paper suggested investors should focus on the underlying assets and their ability to generate long-term cash flows, instead of the short-term volatility of equity prices. 

“Each meaningful increase in sovereign yields since the [Great Financial Crisis], including the Taper tantrum in 2013 and the Bund tantrum in 2015, saw global listed infrastructure underperform global equities on a short-term basis before recovering all of that relative underperformance in the 12 months following,” said Giuseppe Corona, head of global listed infrastructure at AMP Capital. 

“Furthermore, the impact of rising yields should also be taken in the context of listed infrastructure’s sector diversification,” he added. “Sectors such as utilities, communication, transportation and oil and gas storage transportation are not affected by changes to interest rates in the same way so investors can mitigate risk arising from macro factors such as interest rates.”

He then cited the example of communications infrastructure companies. These stocks are typically very sensitive to interest rate changes on account of their long duration and above-average financial leverage. With mobile data traffic growing 4,000 times during the past 10 years and projected to grow at a 53 percent compound annual growth rate between 2015 and 2020, exposure to this secular growth partially offsets the impact of rising rates, he observed. 

Moreover, AMP Capital believes that the volatility of listed infrastructure equities arising from short-term increases in interest rates often presents an opportunity for investors to capitalise on the discrepancy between value and prices.