Real Assets
Why We Favor Listed Infrastructure—Inflation Lifting Rates
Article
May 13, 2021
Inflation has become a growing market concern this year, with rising expectations for inflation pushing up interest rates. Increases in rates are often viewed as negative for listed infrastructure, as rising rates can decrease the present value of expected future cash flows. We believe it’s important to recognize that rising rates are not always bad for listed infrastructure, and we see reason to favor infrastructure equities in today’s rate environment.
The rise in interest rates this year has been fueled mostly by rising inflation expectations pushing up nominal rates, with the 10-year breakeven rate recently hitting an eight-year high. In contrast, real rates (adjusted for inflation) are in negative territory. (See the chart below.) Some of the factors lifting inflation expectations: economic reopening optimism and massive U.S. fiscal stimulus.
We find that when global interest rates are rising due to higher expected inflation pushing up nominal rates, as is the case today, listed infrastructure has historically outperformed global equities. Our research shows that global infrastructure equities have historically outperformed the broad equity market in periods of elevated inflation. (See the chart below.)
We largely attribute this outperformance to the contracted or regulated revenues of infrastructure companies, which often have periodic escalators linked to inflation. We estimate, based on our research, that roughly 70% of our investable universe has explicit inflation protection built in, mechanisms that more than offset any increased cost pressures and help preserve the present value of future cash flows. In addition, end-user demand for infrastructure does not alter significantly when prices change due to the essential nature of infrastructure products and services.
The specifics of a given regulation or contract may leave certain companies in a better position than others amid inflation. Yet we also see another reason to favor infrastructure. Valuations for the sector are attractive and have yet to fully reflect our expectation that a full economic rebound is on the horizon, with the exact timing dependent on the vaccine rollout. Read more on our views in the full commentary.
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This material is not, and is not intended as investment advice, an indication of trading intent or holdings or the prediction of investment performance. All information is current as of the date of this material. Views and information expressed herein are subject to change at any time. Brookfield Public Securities Group LLC disclaims any responsibility to update such views and/or information. This information is deemed to be from reliable sources however, Brookfield Public Securities Group LLC does not warrant its completeness or accuracy. This presentation is not intended to, and does not constitute an offer or solicitation to sell or a solicitation of an offer to buy any security, product, investment advice or service (nor shall any security, product, investment advice or service be offered or sold) in any jurisdiction in which Brookfield Public Securities Group LLC is not licensed to conduct business, and/or an offer, solicitation, purchase or sale would be unavailable or unlawful. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.