There has been little or no correlation between various listed infrastructure assets and inflation over the past 30 years therefore higher inflation and interest rates will have little impact on the valuations of regulated infrastructure assets, according to ClearBridge Investments.
Further to that, the manager expected that some assets could see cash flows increase with upswing in economic growth.
Reserve Bank of Australia (RBA) governor Philip Lowe said he expected the June quarter consumer price index to rise temporarily above 3% due to the unwinding of some pandemic-related price reductions, but beyond that point, inflation pressure would be subdued.
ClearBridge’s portfolio manager, Shane Hurst, said that investors should consider infrastructure assets in two broad categories: user-pays assets and regulated assets.
He added that user-pays assets, such as toll roads, rail networks and airports, revenue were dependent on how many people would use the asset, and with an economic growth recovery, the cashflows of the underlying infrastructure assets should also rise.
“Given the large amount of stimulus proposed by US President Biden, and more expected in the US, and globally, we think there will likely be some cyclical inflation. But in the long term our view is that inflation will remain around 2%,” Hurst noted.
“Either way, rising inflation does not significantly affect utilities and infrastructure assets. Inflation generally gets passed through in the case of utilities via their cost of capital, while user-pays infrastructure assets with concessions and contracts will pass through inflation via tariffs and tolls.
“We have found there is little correlation between listed infrastructure and utility performance and inflation. Looking at the past 30 years, those periods of strongly rising bond yields have been one of the best periods for active managers to position their portfolios to take advantage of market dislocations. This has led to strong returns for investors of infrastructure assets in subsequent periods following the rate rise.”