If interest rates rise and inflation occurs, infrastructure stocks will be more insulated than other equities.
That’s because “infrastructure companies are often monopolies and they’re heavily regulated,” says Nick Langley, investment director and senior portfolio manager of RARE Infrastructure in Sydney. His firm manages the Renaissance Global Infrastructure Fund, and he co-manages the Renaissance Optimal Income Portfolio.
“Most of the regulators across the world take inflation and interest rates into account when [they] set tariffs for infrastructure companies,” he says. For instance, in Europe, Asia and Australia, utilities tariffs are set on four-to-five year bases, so governments can take into account current economic environments.
“Companies are able to hedge against interest-rate risks, so they’re protected against inflation” during that period, adds Langley. What’s more, infrastructure like toll roads and airports often have concessions that link their tariffs to inflation over the longer term.
Langley points out many infrastructure companies have “their revenues linked to their cost bases, particularly the interest portions. […] For more than half their portfolios, companies are protected.”
Looking at specific stocks, Langley says wireless tower companies in the U.S. are attractive for investors looking at the infrastructure space.
Read: Know your infrastructure
“These are the businesses that own the large, steel towers used by telecommunications companies,” he adds. The businesses rent out space to providers so they can install their wireless equipment and provide service to customers.
This is a preferable setup since telecommunications companies have much higher costs of capital. They don’t need to own this underlying infrastructure, so Langley says they simply rent space and pay based on the weight of their equipment.
He predicts that “as the 4G network rolls out across North America, you’ll initially need only a certain amount of towers to get coverage across a wide area.” But as 4G smartphones get more popular—and download volumes increase—the existing network won’t be adequate.
So the number of wireless tower sites across the world will jump, and providers will install “more equipment to [boost] the density of their coverage. That often occurs as companies get more subscribers.”
And as economies and consumer spending picks up, Langley says purchases of smartphones will surge. Telecommunications companies will then have to meet customer demand, so wireless tower companies will pull in more profits.