Building the way to recovery

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June 10, 2020
 

Infrastructure is being affected by the fall-out from global lockdowns and travel bans. But new challenges also bring opportunity, according to Mellon’s infrastructure manager, Jim Lydotes.

Europe has seen the most extensive decline in air services of any world region over the past two months, with the number of scheduled flights down 68% compared to this time last year.1 Unsurprisingly, levels of public transportation use have also plummeted. In the UK alone, Covid-19 has wiped out 73% of road travel, falling to a level the nation has not seen since 1955.2 These are among the many issues infrastructure has had to face as an asset class this year.

Instead of focusing on the negatives, Jim Lydotes, senior portfolio manager at Mellon, sees upside coming from this unprecedented time in financial history. “We’ve seen 12 years’ worth of volatility in the 12 weeks through the end of May and, as active managers, volatility isn’t necessarily a bad thing since it creates disruptions we can try to capitalize on,” says Lydotes.

With the unexpected changes of the past few months, Lydotes has been opportunistic over this period, shifting his portfolio to be more defensive as well as to capture new ideas. Prior to Covid-19, toll road businesses had been viewed as some of the highest quality and most visible assets for infrastructure investing, he says, but notes this also meant they traded at very high multiples.

As people were locked in their houses and not on the roads, for the first time ever, toll traffic ground to a halt. “Investors in these assets have never had to deal with volatility like this. A great deal of uncertainty arose and some of these equity values were cut fully in half,” explains Lydotes.

Despite this year and most likely next year witnessing much weaker-than-normal levels of traffic, Lydotes believes this space still holds future promise.

“If you consider the multiple decades’ worth of cash flows in such assets coming in the future (and the strong balance sheets for the select few we invested in over the period), I believe the dislocation was a great opportunity,” he says.

The next new deal?

In the same way that President Roosevelt shored up the US economy during the Great Depression era with his New Deal, Lydotes believes governments around the world will rely on infrastructure projects to help with their economic recovery efforts. He expects infrastructure sectors will see an uptick in growth as a result.

Large-scale infrastructure projects typically involve large scale job programs, which should get people back to working or offer new employment opportunities, he notes. Lydotes has also been talking with Italian and Spanish companies who have indicated they are already in conversation with government officials on pushing forward with larger buildout plans, a concept which Lydotes believes will gain momentum globally.

What’s next?

Looking ahead to the fast-approaching US presidential election, Lydotes sees infrastructure being a hot topic for the candidates. In the 2016 election it was one of the few areas of common ground between the two parties. “Given the chronic state of disrepair we see in the US infrastructure space today, and the seemingly endless willingness of the US government to stimulate the economy with fiscal spending right now, we think this is going to be, yet again, probably the sole area where both mainstream candidates will agree on headed into the November US elections,” says Lydotes.

As with all other financial sectors, the coronavirus pandemic has altered infrastructure investing globally, but investors can either view the given circumstances as a weakness or a way to explore new thoughts, ideas and avenues in this asset class. In Lydotes’ view, choosing to embrace change allows for more profitable opportunities than fearing the unknown.

1 OAG.com ‘Coronavirus’, May 26, 2020.

2 The Guardian: ‘UK road travel falls to 1955 levels as Covid-19 lockdown takes hold’, May, 26 2020

Risks

All investments involve risk, including the possible loss of principal. Certain investments involve greater or unique risks that should be considered along with the objectives, fees, and expenses before investing.

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.

Views expressed are those of the manager 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. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Mellon and BNY Mellon Securities Corporation are subsidiaries of BNY Mellon. ©2020 BNY Mellon Securities Corporation, distributor, 240 Greenwich St., New York, NY 10286.

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