OpinionAug 8 2016

Infrastructure may already have had its day

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Asking whether central banks have run out of ammo secured its place in the big book of financial journalism clichés long ago. The Bank of England may have cut rates last week, but the question hasn't gone away.

Central bankers themselves have long been dropping hints about the need for more accommodative fiscal policy alongside their own efforts.

What’s changed recently is that fiscal policymakers, ie politicians, have begun to acknowledge those calls. Lately we've heard positive noises on stimulus from the UK government and both of the US presidential candidates.

Fund buyers have already taken notice. As Investment Adviser reported last issue, selectors have begun moving into infrastructure products en masse.

Part of this is to do with diversification, perhaps too a renewed caution on physical property assets, with a bit of income as a bonus. But it’s also in expectation that infrastructure could be set for another moment in the sun as governments consider loosening the purse strings and kickstarting more building products.

Infrastructure equities may be best viewed as something akin to consumer staples rather than a truly diversifying asset

A second look suggests this may not be the wisest strategy, however.

Selectors’ preferred way of accessing the asset class is through funds which buy infrastructure equities. That’s understandable at a time when most closed-ended infrastructure funds, many of which invest in physical assets, continue to trade on sizeable premiums to their net asset value.

But the popularity of these trusts has been mirrored by sizeable gains for infrastructure equities, too.

Both are, in effect, deemed to be bond proxies - the kind of stock that has prospered in an era of record-low interest rates and uncertain growth - despite the negative effect that expansionary, infrastructure-friendly fiscal policy tends to have on government bond prices.

In base currency terms, the Dow Jones Brookfield Global Infrastructure benchmark is up more than 200 per cent since March 2009.

This is broadly comparable with the rise in the S&P 500 over that period. The comparison also holds for price/earnings ratios. The S&P’s trailing P/E ratio stands at 19.7, whereas the iShares Global Infrastructure ETF currently has a P/E of 20.

That’s not to say these stocks can’t continue to prosper. Rather, it’s an illustration of how the sector isn’t just a play on fiscal policy. The sell-off seen last year can be read in the same way: expectations of tighter monetary policy in the US, where most of the major indices’ stocks are listed, briefly brought a halt to the sector’s rally.

Infrastructure has renewed its rise this year, at first as investors reconsidered the speed of the Fed’s tightening cycle and then on this talk of fiscal stimulus.

The combination of these two factors may well mean more good times ahead. It’s also a reason why infrastructure equities may be best viewed as something akin to consumer staples rather than a truly diversifying asset.

Dan Jones is editor of Investment Adviser