Following rare double-digit drops in both equities and bonds so far this year, recent price corrections may create attractive entry points for investors in select infrastructure and real estate sectors.
Larry Antonatos, managing director and portfolio manager with Brookfield Asset Management, said while rising interest rates around the world have created a headwind for valuations, inflation running higher for longer is actually a tailwind for cash flows.
This tailwind is more pronounced for infrastructure as pricing is generally based on long-term contracts that allow prices to rise with inflation, Antonatos said. Pricing for real estate rent is typically based on lease contracts determined by negotiations between landlords and tenants and more subject to supply and demand conditions, he said.
Year to date, Antonatos said the infrastructure equity benchmark is down 15% while the real estate equity benchmark is down 29%. That compares to the MSCI World Index down about 25% in the first three quarters, he said.
Within infrastructure, the strongest performing sector was oil and gas storage and transportation, down 2% year to date, Antonatos said.
“The sector benefited from strong supply-demand fundamentals and high commodity prices in the underlying oil and gas sectors,” he said. “Strong performance has been accompanied by strong earnings growth. Accordingly, valuations remain reasonable and we expect sector outperformance will continue.“
Conversely, communications dropped 29% over the same period, despite strong supply-demand fundamentals and cash-flow growth after the sector began the year at high valuations, Antonatos said.
“Valuations are now reasonable and provide an attractive entry point for this high-growth infrastructure sector,” he said.
Within real estate, the same opportunity lies within industrial and data centres, which began the year with high valuations but have seen declines of 36% and 35%, respectively, providing an attractive entry point.
In contrast, he said office space (down 36%) continues to suffer from a lack of demand due to ongoing uncertainty surrounding work from home.
In summary, Antonatos said this year’s price corrections have created attractive entry points for select infrastructure and real estate sectors with strong fundamentals, strong growth potential and strong pricing power.
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