Investors are waiting for central banks to hike interest rates across the globe, but not all market participants are nervous about it.
Nick Langley, investment director and senior portfolio manager for RARE Infrastructure in Sydney, Australia, is actually excited about the way the market is thinking about interest rates starting to move.
Langley, who manages the Renaissance Global Infrastructure Fund, predicts 2015 will turn out to be an interesting transition year for infrastructure, which can be sensitive to interest rates. “As bond yields move up, traditional defensive utilities sell off,” he explains.
So, “we have very few of [those utilities] in our portfolio at the moment. But, if bond yields move up—and if they move up because the economy is getting better—infrastructure companies such as railroads, toll roads and airport exposures tend to do better. The market builds some top-line growth.”
As utilities sell off, Langley adds, “we’ll also be able to rotate some exposure into utility companies. That will put the portfolio on a very strong footing for the next few years.”
In Japan, Langley is seeing a significant push toward infrastructure investment. “I’m encouraged by the fact that [Japanese] companies are recognizing the importance of shareholder returns. We’re seeing more appropriate returns being offered on [infrastructure] projects.”
Many of Japan’s tsunami-hit nuclear power stations still aren’t functional, for instance, so he expects the electricity sector to benefit. “Some of those [nuclear reactors] will come back on line. But over the next couple of decades, [Japan] needs to build a lot of gas, fire and power stations, and we’re seeing chatter about that now.”
Plus, the country’s resurgent rail sector may see significant development. “There’s quite a lot of activity there, based on historical standards, and we’re looking at pretty good returns for investors.”
Southern Europe also holds promise for infrastructure investors. After an extended austerity phase in Spain, says Langley, the country’s gas and electricity sectors have had regulatory arrangements reset, and that allows for more certainty regarding earnings going forward.
“We’ve also got an environment of very low bond yields for the foreseeable future in Europe,” he adds, [which] makes utilities in Spain—and, to a lesser extent, in Italy—very attractive, especially for investors looking for low-risk, high-income returns.”