The COVID-19 "coronavirus" is the latest trigger for equity markets to sell off sharply. While we are still in the early stages of understanding the severity and duration of the economic impacts of the virus, it is clear that the shutdowns occurring to slow the spread and manage the emergency, will have wide ranging implications for individuals and companies. The key question for investors is how do you allocate in this uncertain environment?
Investing in global listed infrastructure allows investors to navigate market volatility while still remaining in equities. This is because the infrastructure companies that RARE invests in earn their revenue under regulatory structures or long-term concession contracts, leading to more predictable cash flow, even during periods of slowdown or recession.
As this health emergency plays out further, we are of the view that essential assets - which deliver visible and growing earnings - will be sought after by investors. As demonstrated by the graph below, listed infrastructure is less likely to be impacted during declining equity markets while continuing to participate in a reasonable share of the upside.
RARE Calculations as at 31 December 2019. Global Equities – MSCI AC World, Gross, Local, FactSet Research Systems (Index Code – MSCI:892400) since 1 July 1996. RARE Income Fund Universe, Local, FactSet Research Systems (FactSet code: CLIENT: Yield_Universe).There may be differences between the strategy and the RARE Infrastructure Income Universe including differences in the amount of assets under management, cash flows, fees and expenses, and applicable regulatory requirements, including investment and borrowing restrictions. The past performance and allocations of the strategy may not be indicative of the RARE Income Universe over the same period. For more information on the strategy composite see the composite disclosure in the appendix.
Of course, these historic relationships can vary month to month as seen by the scatter points. Since the current sell down began in February 2020, regulated sectors, such as the electric and water utilities, have held up well compared to equities; however, the impact of the shutdowns on transport assets such as airports and toll roads have affected these companies sharply.
Where loss aversion is a key driver, the RARE Infrastructure Income Strategy contains bias toward utility sectors and may further limit the impact of economic downturns. This defensive strategy, which consists predominantly of utility companies, targets a 5%+ underlying dividend yield, growing in excess of inflation, plus the opportunity for capital upside.
Earnings are linked to the underlying asset base rather than the economic cycle. So, while stock prices of these companies may be affected by broad market sell-offs, their resilient earnings and cash flow profile gives us confidence that the stock price will bounce back once fundamentals become the key driver again. In the meantime, investors are “paid to wait” as the companies continue to pay attractive and growing dividends.