Brookfield Asset Management—global listed infrastructure market update

March 26, 2020

Leonardo Anguiano and Tom Miller provide their views on the global listed infrastructure market

• The team is expecting a brief, but very sharp slowdown in global economic activity, with 1-2 or perhaps 3 quarters of negative growth before normalizing.
• It’s important to distinguish between short-term cash flow disruptions and long-term value diminishment. Many of our asset classes will experience the former.
• Infrastructure assets around the globe are essential to the functioning of the modern economy. These are very long- lived assets with high level of predictable cash flow, high barriers to entry and critical for the economy.
• Important to remember that infrastructure assets have broadly defensive characteristics given that they provide essential services and that they are typically monopolistic in nature.
• Many of the sectors the Manulife Global Listed Infrastructure Fund invests in have limited sensitivity to COVID-19, for example electric, water, gas utilities or communication towers provide essential services, industrial real estate and multi-family real estate are essential assets for each economy and its people. However, there are some sectors that will be impacted: airports, hotels as a fall-out from COVID-19 pandemic travel restrictions; energy infrastructure as a result of the demand decline for energy, as well as the fall in energy prices. These issues may be short-term or long-term in duration.
• In the near term, we will see some sectors more impacted than others - specifically we have already seen significant weakness in the listed airport space, as new travel restriction measures are being implemented across the world.
• On the positive, we already see some deep value opportunities emerge, as our view remains that the global propensity to travel will return once we get through this crisis.  We are re-evaluating the airport names that we hold, to ensure that they have balance sheets that are in order, access to sufficient liquidity and their airline counterparties will be able to continue moving forward.
• Utilities sector has been performing as expected – most economically insensitive across the spectrum of listed infrastructure, significant outperformance from the global electric, water and gas utilities space. More pronounced valuation dispersion intra-sector within utilities as the pure regulated grids are significantly outperforming and showing expanding valuations premiums vs. those business that have non-regulated exposure. The team is looking at opportunities at stock specific level within the broad utilities space.
• Communications – performed strongly – no significant demand change for new tower leasing
• Energy infrastructure is challenged at the moment, given the dulled demand and supply shock. With crude oil pricing in free-fall, it is clear that many of the producing basins in the U.S. are not economical at these price levels, so the team is focused on those companies with significant balance sheet protection, that would be able to weather the storm and come out of this cycle as long-term winners.
• Positioning: The team has taken the opportunity to de-risk the portfolio over the last month or so, as the concerns over the spread of COVID-19 have heightened. They have done this by raising a little more cash in the portfolio, reducing some of the higher beta positions such as taking energy infrastructure down, decreasing some of the exposure to Latin America, and trimming some of the exposure to peripheral Europe, which is in the eye of the storm right now, all the while keeping an eye on opportunities.     
• High level, the team is focused on companies with strong balance sheets, access to liquidity, and positioned in some of the more defensive subsectors within the infrastructure space, firmly keeping an eye on emerging opportunities particularly across the airport space, as well as select utilities and energy infrastructure.