To ensure an optimal and secure experience, please upgrade to the latest version of your browser.
With one of the most volatile years of recent history almost behind us, the time may now be right to ask: what comes next? If recent pronouncements from global intergovernmental agencies are anything to go by, we’re not out of the woods just yet.
The International Monetary Fund (IMF) in its latest World Economic Outlook, said the global economy is likely to have experienced a 4.4% contraction in 2020 and is forecasting only a partial rebound to 5.2% growth in 2021. Overall, this would leave 2021 gross domestic product (GDP) well above six percentage points lower than in the IMF’s pre-COVID-19 projections.
Against the backdrop of this once-in-a-generation economic dislocation, fiscal and monetary policy have been the watchword of central banks and governments the world over. Global public debt is likely to have hit a record high of almost 100% of the world’s gross domestic product in 2020, according to the IMF, and expectations are for government debt to rise significantly in proportion to national income in most advanced economies through the coming year.1
In the US, the Federal Reserve (Fed) slashed interest rates by a full percentage point to effectively zero and launched a US$700bn package of quantitative easing (QE). This was accompanied by the US$2.3tn Coronavirus Aid, Relief and Economy Security Act (CARES). In Europe, the European Central Bank (ECB) extended its QE program by more than 750 billion euros.2
No surprise, then, that for many, the question now is whether a return to inflation might be in the cards. Positive news on a potential Covid-19 vaccine was the catalyst for a steepening of the yield curve in November 2020. Around the same time, tentative signs of a switch in equity investor momentum away from growth stocks in favor of value stocks told a similar story. Both might point to a fundamental rebalancing of macro-economic assumptions in a post-pandemic world.
In the face of such uncertainty, then, where might investors turn? According to Jim Lydotes, BNY Mellon senior portfolio manager, infrastructure assets have their appeal. They can be defensive, relatively stable, and yield-generating. It is, therefore, understandable if they are often described as “bond proxies” and have, accordingly, tended to attract income-focused investors. “Regardless of the prevailing economic backdrop, demands for assets, such as toll roads and regulated utilities typically remain strong,”3 says Lydotes.
And while bonds and infrastructure do share similar characteristics, the longevity of our current low inflation environment means that many investors have forgotten the one key difference that distinguishes the two: infrastructure’s value as an inflation hedge.
Here, Lydotes suggests viewing inflation protection as an undervalued call option embedded into infrastructure assets. As we have already noted, the prospect of inflation is so foreign that in recent years protection has not been priced in, but investors will put a value on that option “as soon as they get a whiff of rising prices,” he says.
Furthermore, Covid-19 has added a new dimension to the listed infrastructure story. Even as recently as 12 months ago, it would have been easy to argue the asset class was broadly similar to most of its diversified real estate peers. “Now,” Lydotes says, “the pandemic is posing a secular challenge to many sectors of the property market.” This is particularly true for sectors such as hospitality where second- and third-wave lockdowns have brought many hitherto profitable businesses to their knees. In contrast, listed infrastructure with its access to stable, recurring income streams stands apart as an asset class relatively unscathed by the worst of the pandemic, according to Lydotes.
Gaining access to infrastructure assets is also relatively straightforward, says Lydotes, with multiple avenues of exposure available: direct investment, listed equities, funds, or ETFs.
“In my view, there is considerable value to be found in listed equities,” he concludes. “Over the past five to 10 years, a lot of capital has focused on the private space, and the multiples that private infrastructure funds have been willing to pay for these assets are continually being bid up. As a result, in the past threeto- five years, valuations in the listed space have become more and more compelling.”4
1 Financial Times: ‘IMF says austerity is not inevitable to ease pandemic impact on public finances’, 14 October 2020.
2 KPMG: ‘Central Banks respond to the pandemic’, 16 Nov 2020
3 Mellon Investments Corporation. November 2020.
4 Mellon Investments Corporation. November 2020.
All investments involve some level of risk, including loss of principal. Certain investments have specific or unique risks.
No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
Recent market risks include pandemic risks related to COVID-19. The effects of COVID-19 have contributed to increased volatility in global markets and will likely affect certain countries, companies, industries and market sectors more dramatically than others.
Views expressed are those of the author stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change. This information contains projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or expectations will be achieved, and actual results may be significantly different from that shown here. The information is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Please consult a legal, tax or financial professional in order to determine whether an investment product or service is appropriate for a particular situation.
Mellon is a global multi-specialist investment manager dedicated to serving our clients with a full spectrum of research-driven solutions. Mellon Investments Corporation (Mellon) is a registered investment adviser and an indirect subsidiary of The Bank of New York Mellon Corporation.
BNY Mellon Investment Management is one of the world’s leading investment management organizations and one of the top U.S. wealth managers, encompassing BNY Mellon’s affiliated investment management firms, wealth management organization and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. BNY Mellon Securities Corporation is a subsidiary of BNY Mellon.
Not FDIC-Insured | No Bank Guarantee | May Lose Value
© 2020 BNY Mellon Securities Corporation, 240 Greenwich Street, 9th Floor, New York NY, 10286