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Larry Antonatos, portfolio manager, Brookfield Asset Management.
Infrastructure provides essential services, such as electricity, water, communication and transportation. Infrastructure is generally characterized by limited competition, steady demand for essential services, and regulated pricing frequently linked to inflation or to long-term contracts. This business model generally drives predictable and growing cash flows with low volatility and attractive inflation linkage.
However, 2020 was an unusual year. Infrastructure was in the bull’s eye of the Covid-19 lockdowns, as both economic activity and mobility declined dramatically.
Within public infrastructure equities, benchmark returns were modestly negative in 2020, with a wide dispersion of returns by sector. Two winning sectors delivered positive performance. The top-performing sector was communications infrastructure, as work-from-home drove demand for mobile service and streaming. Water infrastructure, which has very low economic sensitivity was also positive. All other infrastructure sectors delivered negative performance in 2020, with the mobility-sensitive transportation sectors, which are airports, seaports and toll roads, lagging, and the economically sensitive oil and gas pipeline sector bringing up the rear.
This pattern of returns, however, reversed in 2020 Q4, as the positive vaccine news in early November drove strength in transportation infrastructure and strength in oil and gas pipelines.
In contrast to infrastructure equities, broad equities delivered very strong performance in calendar year 2020, driven to a large degree by strength in the technology sector.
The relative underperformance of infrastructure equities has created a compelling value opportunity. Considering three key valuation metrics, EV to EBITDA, price-to-earnings and dividend yield, infrastructure equities have never been cheaper relative to broad equities. This creates a very attractive short-term buying opportunity.
Over the longer term, prospects remain bright, as we see three key growth opportunities in infrastructure.
First, the transition from carbon-based energy to renewable energy will create significant investment opportunity. Over the next 30 years, we anticipate $25 billion of investment in renewable generation, as renewables grow to become the majority of electricity generation. In addition, we anticipate $75 billion of investment in transmission, distribution and storage to modernize the electricity grid to embrace renewables. Electricity storage will be a key area of investment to address the intermittency issues of renewables. With the growth in renewables, many traditional electric utilities are retiring their coal plants and replacing them with gas plants and new renewable plants — solar, wind and water. So, access to renewables is available through many companies that are well-known, as well as new renewable specialists.
The second area of opportunity, communications infrastructure must increase to accommodate growth in data usage. Mobile data usage increased 14% in calendar year 2020, driven in part by Covid-19 lockdowns. While this high rate of growth is an anomaly, we anticipate strong long-term growth in data usage for many years.
A third opportunity is in transportation infrastructure. Aging transportation infrastructure in developed markets will be modernized increasingly through reliance on public-private partnerships, also known as P3. In this P3 model, investor capital replaces government capital, and investor management replaces government management. The combination of discounted valuation and long-term growth makes infrastructure a compelling investment opportunity.