Even though the current interest rate upcycle started in December 2015, the current interest rate environment remains benign. As of January 2018, there have been five increases, and the market expects another three increases this year. The long end of the curve, measured by the 10-year US government bond rate, likewise, is still benign and below the 2014 peak, even after the increase observed this month.
Real estate, being an interest-rate sensitive asset class, continued to see price increases amid this backdrop. The resulting lower yield, have prompted both institutional and individual investors to seek other cash flow producing assets. As a result, Global Listed Infrastructure Securities (GLIS) have become an alternative for investors who are looking for steady income from real assets other than real estate/REITs/high dividend yield stocks, as well as an inflation hedge.
What Is GLIS?
In general, GLIS are defined as listed securities exposed to economic infrastructure assets that are fundamental to the operation of an economy. Moreover, these infrastructure assets are deemed to be natural monopoly/quasi-monopoly and have steady income streams. Although most GLIS are found within the energy/oil and gas, transportation, communications, and utility sectors, there is divergence about what defines infrastructure investment.
A narrower, perhaps more investable, definition of GLIS includes securities owning assets that facilitate the movement of people, goods, natural resources, and information. Moreover, the emphasis is on the ability to generate stable and predictable cash flows from natural or quasi-monopoly market positioning, long-term contracts with upstream and/or downstream companies, and other government mandated situations.
While in theory, a GLIS can be regulated or unregulated, it is more likely to be a regulated entity due to its monopolistic nature. Under such definition, a GLIS may include only owners of pure infrastructure assets, such as electricity transmission networks, oil and gas pipeline networks, water supply facilities, telecommunication towers, broadcasting towers, satellites, airports, marine ports, toll roads, and railways.
As an asset class, GLIS has grown substantially after the global financial crisis (GFC), as banks were forced to deleverage, governments were forced to tighten controls on fiscal budgets and private corporations were looking for ways to streamline and optimise their capital structures. The global market capitalization of the sector has grown to over US$2 trillion, according to the broader FTSE Global Core Infrastructure Index. The GPR Pure Infrastructure Index, an index that focused on the aforementioned “assets that facilitate the movement of people, goods, natural resources, and information,” has a global market cap of US$888 billion. In Asia Pacific, infrastructure trusts are now a US$500 billion sector, with about half of the market cap listed in Japan, a quarter in Hong Kong, and about 20 percent in Australia.
Potential Headwinds For This Asset Class
In terms of potential headwinds and risks, two distinct challenges arose for the continued securitisation of the sector. First, economic nationalism and security concerns may prompt governments to be more conservative in allowing assets to be securitised. Even after securitisation, changes in the political environment have profound impacts on these investments.
Whilst calls of economic nationalism and reversal of globalisation have not significantly affected infrastructure investments in the past, the rising tides of populism may have negative implications for infrastructure. Potentially, GLIS may face increasing political and legal risks under rising populist trends via government interventions, such as interferences in pricing, business behaviour and issues of non-domestic ownership. Second, a range of technology changes, particularly as related to energy generation, storage, and usage, can disrupt the business models of infrastructure stocks.
Still A Good Alternative
Nonetheless, we believe that several factors should support the continued growth in the infrastructure investment universe. More developed economies will increasingly seek private funding as they replace and rebuild aged infrastructure assets. Developing economies will also see investment from urbanisation and expansion of mega-cities. This will require a substantial upgrade in existing infrastructure assets and investments in new infrastructure assets to support urban expansion. For example, the continuing growth in air passenger travel will provide additional stimulus for airport development.
Large government initiatives, such as China’s “One-Belt, One-Road” development strategy, can potentially provide additional stimulus to infrastructure investments across Asia, Europe, and Africa. This last point may be specifically significant for Hong Kong, which is already a quarter of the Asia Pacific LIS universe and is well disposed to accept more listing from all around the region.
In short, we believe that investors looking at infrastructure trusts today can find many similarities to REITs and other forms of commercial real estate. This sector can potentially diversify their cash generating holdings, and provide a level of inflation hedge.