Common knowledge argues that rising long-term interest rates generally result in weak listed infrastructure share price performance relative to global equities.
Yet a report released this week by Australian asset manager AMP Capital expects the sector to continue posting stronger returns than mainstream asset classes – despite the expected increase in interest rates across global markets.
Such resilience, the study finds, will likely come from the lesser sensitivity of its share prices in an environment where the yield curve “flattens”, i.e. when short-term and long-term yields are nearly identical. This is expected in a macroeconomic context that exhibits both signals of short-term recovery and uncertainty over long-term prospects.
Under a scenario of drastic flattening, such as that observed in September 2006, AMP says the global listed infrastructure asset class would generate a return of 7.4 percent – nearly 6 percent higher than global equities. The more likely case of a moderate tightening would see listed infrastructure yield an absolute 6.3 percent, which the firm estimates would still better the performance of global equities by 2 percent.
Such conclusions would be especially true for what it labels “core and pure” companies, in particular for energy assets, such as pipelines, and communications infrastructure businesses.
The robustness of these assets, the study reckons, owes to their “defensive growth” characteristics: in an environment where economic expectations remain largely unchanged – as can be the case when the yield curve flattens – the cash flows generated by such assets are relatively protected. Meanwhile, rising inflation is generally hedged through indexed revenues.
“Stable, reliable, growing cash flows are unique characteristics to the global listed infrastructure asset class and contribute to attractive risk-adjusted returns,” the report said.
AMP estimates the size of the global listed infrastructure market at $2.5 trillion, compared with $305 billion for its direct, unlisted counterpart.