Flying far and wide with infrastructure

 

Last week, Sydney Airports announced its first half results increasing its dividend to 34.5c following growth in retail (+14.3% yoy), airport traffic (+7.7% yoy) and parking and ground revenue (+2.2% yoy).  The current interest rate and political environment is promising for infrastructure assets, but while Sydney Airport is good at what it does investors should diversify on geography, assets and management teams.

Infrastructure as a defensive asset

Infrastructure assets have demonstrated lower volatility and a low correlation compared to traditional asset classes.  They are large and have little or no competition, protected by high barriers to entry. Infrastructure is considered an ‘alternative’ asset class and institutional clients, such as large super funds, have used it for years as a diversifier away from equities, fixed income, property and cash.  Investment vehicles such as ETFs are making it easier for investors to access ‘alternative' investments such as infrastructure.  IFRA is the only infrastructure ETF on ASX and the index it tracks can demonstrate lower volatility than Australian shares with significant outperformance over the past few years.

IFRA correlation and performance

The current interest rate environment

Infrastructure assets have traditionally been inversely correlated to US 10 year bond yields and so far 2017 has been no different.   Now, with the Fed’s commentary having changed from its rate rising tone in the first half of 2017 to a tone that indicates another rate rise may not occur in 2017, infrastructure may have been oversold.

US 10 year bond v IFRA Index

Government investment in infrastructure is likely to continue fuelling growth

In announcing its results, Sydney Airports highlighted its growth strategy which is focused on increasing capacity and customer satisfaction.  The ambitious Marketplace in the international terminal is scheduled to be completed at the end of this year to complement the retail outlets recently completed in T1 and T2.  This type of spending on infrastructure and the resulting potential for corporate growth is further supported by government policy.

According to a 2016 report “Failure to Act” by the American Society of Civil Engineers, the US needs to spend US$3.3 trillion on infrastructure and  it has been well documents that President Trump has signalled that he will commence infrastructure spending before the end of the year.  Other governments, including our own, are also looking to boost their economies by spending on infrastructure assets.  Japan for instance has invested US$100 billion for roads, bridges and railways.  China has stated it will put billions into the ‘Silk Road’ project connecting Asian economies. 

As more and more money is poured into infrastructure projects, existing companies benefit from these government policies and increased demand.

Easy access to a portfolio of global infrastructure assets

IFRA gives investors single trade access to a portfolio of 154 global securities that are diversified on a subsector and country basis.

IFRA Asset allocation

 

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Published: 09 August 2018