ClearBridge sees bright prospects for listed infrastructure amid challenging market

By Newsdesk

December 07 2023
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Investors in the listed infrastructure sector might have faced valuation challenges in the past year, but ClearBridge Investments signals a hopeful outlook for 2024.

ClearBridge sees bright prospects for listed infrastructure amid challenging market

Fundamentals seem to be aligning to suggest that this asset class may soon outshine broader equities.

Nick Langley, a ClearBridge Investments portfolio manager, contends that while listed Infrastructure has been defensive during the valuation downturn, it continues to offer stability in investors' portfolios. "Earnings from the listed infrastructure companies have held up well. However, valuations are off as significant increase in bond yields have adversely affected valuations," Langley explained.

Listed infrastructure assets, such as utilities, have seen their multiples drop noticeably. "Multiples for utility companies, which are at the most defensive end of our investment universe, have come down from 19 times to 16 times. Utility companies in the S&P 500 Index are off about 15% year to date," Langley shared, underscoring the recent performance.

Despite this, Langley emphasizes the inherent strengths of infrastructure investments, such as the ability to pass through costs via regulated mechanisms. "Investors should remember that infrastructure features regulated pass through mechanisms for increasing returns to reflect borrowing costs/inflation and other expenses. That is in process now as concession agreements mandate for recovering increases in costs," he stated.

The rate at which these pass-through mechanisms reflect in earnings can vary across sectors. Toll roads can adjust relatively swiftly, while utilities may take one to two years due to regulatory processes. According to Langley, "Today we are in a position like we were in 2019. We’re seeing higher pass throughs of higher bond yields and allowed returns for companies. We expect that to continue into 2024 and through to 2025."

Reflecting on the past, Langley recounts that a difficult 2018 for valuations preceded a strong 2019 for listed infrastructure, hinting at possible parallels to the current situation. The integration of real assets and inflation pass-through mechanisms positions infrastructure investments as a significant diversifier within a portfolio.

Infrastructure might also be poised to benefit from broader market movements. "From an earnings perspective, assuming we get a slowdown in economic activity into 2024, and that’s looking more and more likely, we continue to see positive earnings revisions for the infrastructure companies, particularly the utilities based on pass through of inflation and growth in their underlying asset basis as we move through the energy transition process," Langley observed.

ClearBridge seems optimistic that infrastructure companies can expect positive earnings revisions in 2024, contrasting with the broader equity market, which may see negative adjustments due to a potential economic slowdown. This differing trajectory could mark listed infrastructure as a domain for investors to watch carefully in the coming year.

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