(Nov 11): Uncertainty has become more pronounced in recent times. Global manufacturing weakness, stubbornly low inflation, low economic growth and ceaseless geopolitical tensions have the world on edge.
However, while there is plenty to worry about, equities are still an engaging proposition. Yes, the probability of recession has increased but it is still unlikely that the US economy, with record low unemployment, will dip into recession anytime soon. Central banks are once again providing monetary stimulus and fiscal stimulus is starting to come through. Retreating to cash or bonds runs the risk of missing out on potentially meaningful returns over the next year.
In this environment, we believe investing in global listed infrastructure allows investors to navigate market volatility while remaining in equities. This is because infrastructure companies, when selected appropriately, can provide excellent visibility over revenues and dividends, driven by stable earnings of the underlying assets, regulation and long-term contracts.
A maturing business cycle means that quality assets that deliver growing earnings will be sought after and attract more capital as investors become more defensively positioned. As demonstrated in the chart, listed infrastructure provides downside mitigation whilst participating on the upside. Investors can also see that a shallower drawdown leads to an earlier recovery.
This downside mitigation can, over the long term, translate into a strategy that provides superior risk return characteristics over global equities.
The bottom line: The global economy has slowed in 2019. Trade tensions have increased the risk of economies slipping into recession. On the other hand, synchronised monetary stimulus is starting to be joined by fiscal stimulus. What’s more, low inflation along with low bond yields would suggest equities could still do well. Going forward, global listed infrastructure allows investors to remain invested in equities whilst having the peace of mind that they have some defence built into their portfolio.
RARE Infrastructure is an affiliate of Legg Mason Asset Management based in Sydney
