Alt Thinking September 26, 2024
Insight Series
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Reasons to Own Infrastructure in a Declining Rate Environment

Infrastructure Equities as a Core Investment: Balancing Stability, Growth, and Income in Changing Economic Environments
Key Takeaways
  • Infrastructure spans sectors sensitive to GDP and interest rates, offering diverse performance drivers.
  • The asset class should be viewed as a core portfolio component rather than a niche investment.
  • Infrastructure equities balance defensive stability with growth potential.
  • These assets remain valuable in various economic environments.
Infrastructure Equities as a Core Investment: Balancing Stability, Growth, and Income in Changing Economic Environments

Reasons to Own Infrastructure in a Declining Rate Environment

The infrastructure asset class includes sectors that are sensitive to both GDP (like Energy and Industries) and interest rates (such as Real Estate and Utilities). These sectors perform differently based on economic growth and interest rate trends, which is why infrastructure should be thought of as a core component of a well-rounded portfolio, rather than a niche investment. Its performance more closely mirrors that of a diversified, balanced fund.

Further, investing in infrastructure equities during a declining rate environment with slowing economic growth may improve the risk adjusted returns of a diversified portfolio for several reasons. 

Here are the top factors to consider:

Stable Revenue and Cash Flow Streams

Infrastructure assets, such as those in the utilities, transportation, and energy sectors, typically provide essential services, which means demand remains relatively stable throughout the business cycle. These assets often have long-term contracts or regulated revenue structures, ensuring steady cash flows and stability.

Attractive Dividend Yields

Infrastructure companies may often offer higher-than-average dividend yields. In a declining interest rate environment, income-seeking investors may be drawn to equities that provide consistent and attractive dividends, making infrastructure stocks more appealing. As bond yields fall, infrastructure equities become more competitive as a source of investment income.

Capital Appreciation as Rates Decline

As interest rates fall, the cost of capital decreases for infrastructure companies, which often require significant financing for large-scale projects. Lower financing costs can improve profitability and expand the capacity for growth projects, potentially driving capital appreciation. Additionally, declining rates often boost asset valuations, benefiting infrastructure stock valuations.

Long-Term Growth Potential

Infrastructure projects are typically long-term in nature and capital-intensive, with demand for them continuing to rise due to population growth, urbanization, and the need for modernization in both developed and developing economies. Government initiatives, particularly in renewable energy and digital infrastructure, often support these projects, creating potential for growth even when the broader economy slows.

Low Correlation to Broader Market Volatility

Infrastructure equities tend to have a low correlation to broader equity market volatility. Their performance is more linked to operational metrics and contract structures rather than short-term market sentiment, making them relatively defensive investments in uncertain or declining market conditions.

Inflation Protection

Many infrastructure assets, particularly in sectors like utilities and transportation, have pricing mechanisms linked to inflation. Even in slow-growth environments, these assets can adjust prices upward, providing a natural hedge against inflation, which is beneficial in a fluctuating economic climate.

Government Stimulus and Support

In periods of slow economic growth, governments frequently introduce fiscal stimulus packages that focus on infrastructure development to boost employment and economic activity. Infrastructure companies stand to benefit from increased spending on public works, transportation systems, renewable energy, and other critical projects, supporting growth.

Resilient to Economic Downturns

Unlike other sectors that may be more cyclical, infrastructure is generally less sensitive to economic cycles. The essential nature of infrastructure services—like electricity, water, and transport—ensures that these companies maintain demand and revenue even when broader consumer spending declines.
 
By focusing on these factors, infrastructure equities can offer a combination of defensive qualities and growth potential irrespective of the economic environment.

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  • NPP356
    (Series F)
    Mutual Funds Sector Equity
    $14.51 -$0.26 (-1.79%)
    As at 12/18/2024
    Growth of $10,000 Invested as at 11/29/2024
    Performance as at 11/29/2024
    1 Year
    31.66%
    3 Year
    12.87%
    5 Year
    10.64%
    10 Year
    8.04%
    Incept.1
    8.86%
    1 Inception Date 9/1/2011
    Go To Fund

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