QIC’s Matina Papathanasiou: ‘Stress testing will be of heightened focus’

The covid-19 pandemic is, first and foremost, a health and wellbeing crisis and, secondly, an economic crisis, the scale of which we have not seen since the Great Depression. Here are three themes that are likely to fall under the spotlight.

Diversification

An investor’s approach to portfolio construction and diversification will be critical in determining whether it, in fact, delivers on the infrastructure asset class objectives. Covid-19 has been a stark reminder of one of the biggest risks in managing long-term infrastructure portfolios across multiple market cycles: that failing to diversify across key value drivers can cause significant volatility in portfolios. With the impacts of covid-19 being most felt by the transport sub-sector, we expect a greater focus on utilities, digital infrastructure, decarbonisation and social/PPP assets to support the development of robust and resilient portfolios.

Stress testing and shock and sensitivity analysis will be of heightened focus in a post-covid-19 world. Base case assumptions may incorporate some type of default shock, given the long duration of the asset class. The valuation environment is evolving in the short term and will, in our view, look different to where it was pre-covid-19. With the current uncertainty as to what the ‘new normal’ may look like and potential structural changes, risk is arguably elevated for some assets and sub-sectors.

Investors should therefore be cautious about ‘cheap buys’, particularly for patronage assets in the current environment, given the challenges in forecasting cashflows against historical performance or other shock dislocations that have occurred.

Resilience

The pandemic has also shone a spotlight on resilience and sustainability for infrastructure investments, especially given the essential service nature of the asset class. Asset managers have seen first-hand the importance of having strong work health and safety practices and protocols, business continuity plans and experienced management teams to ensure the uninterrupted delivery of these essential services. Asset resilience will also continue to be measured more broadly in terms of prudency in capital structure, with an increased focus on diversification across different funding markets, lender relationships and supply chains, as well as staggered maturity profiles and prudent levels of gearing.

Government partnerships

In the aftermath of covid-19, we expect there may be unique opportunities to partner with governments to support economic recovery and repairing the public balance sheet.
In response to the pandemic, we have seen some of the largest fiscal stimulus packages since the Second World War. So far, these packages have been focused on short-term support measures to bridge liquidity issues and offset depressed levels of household consumption and business investment.

As attention turns towards economic recovery, fiscal stimulus will increasingly focus on accelerating the pipeline of productivity-enhancing infrastructure projects. It is an ideal time for governments to increase their commitment to long-term ‘nation-building’ priorities, such as energy decarbonisation and network resilience, digital connectivity, transport network capacity and water security.

In some countries this may be underpinned by a further recycling of assets from government and a potential increase in public-private partnerships, which we expect will present attractive infrastructure investment opportunities.