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Infrastructure stocks could outperform in 2019

Nicki Bourlioufas  |  21 Dec 2018Text size  Decrease  Increase  |  
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Infrastructure stocks including Sydney Airport and Transurban outperformed in 2018 as volatility came back to the stock market and fled to defensive stocks.

Experts predict infrastructure assets could continue to outperform in 2019. And their performance has been boosted by the falling 10-year bond yield, which may help to reduce borrowing costs.

infrastructure toll roads

Infrastructure assets have been boosted by the falling 10-year bond yield

Sydney Airport (ASX: SYD) is well up on its year low of $6.24 struck in October, and has risen to $6.94 at the time of writing on 20 December. Over the past 12 months, Sydney Airport is down 2.3 per cent while the S&P/ASX 200 is down much more at 8.5 per cent.

Another popular infrastructure stock, Transurban (ASX: TCL), has risen from a low of $10.62 in October to $11.75 at the time of writing. The toll road operator is down 3.9 per cent over the year to date, less than half the S&P/ASX 200’s fall.

Auckland International Airport (ASX: AIA) has rallied particularly hard, and is up 16.4 per cent over the year to 20 December to $6.94, so shareholders are also celebrating its outperformance of even other infrastructure stocks.

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Adam Fleck, Morningstar's regional director of equity research for Australia and New Zealand, says the outperformance by Auckland International and Sydney Airport can be traced back to the fact that both were fairly to slightly undervalued at the start of the year, versus an overvalued ASX 200, which has since corrected.

Fleck notes that both Sydney Airport and Auckland International are now fairly valued. Auckland International has a $6.90 fair value estimate; Sydney Airport has a $7.30 fair value.

In addition, "a falling long-term bond yield is positive for airport stocks, given a high level of gearing and investors typically seeing these as a bond proxy — that has likely supported the stocks’ valuations throughout the year, as well," Fleck says. A bond proxy is a stock that is held in place of fixed interest securities, primarily for the yield they provide.

While the 10-year government bond yield started the year around 2.86 per cent, it has since fallen to about 2.42 per cent. The yield on the five-year bond is about 2.08 per cent, down from 2.48 per cent in January. That compares to higher yields on infrastructure stocks. Sydney Airport has yielded 5.1 per cent, 4.8 per cent on Transurban and Auckland International at 3 per cent.

Fleck is most optimistic about Auckland International, which enjoys a wide economic moat compared to Sydney Airport's narrow moat, "given its ownership of its namesake airport, as well as the large industrial, commercial, and retail precinct surrounding. New
Zealand continues to grow as a top-notch tourist destination, with several international airlines announcing plans to fly to the country, and Auckland should remain
its gateway."

Outperformance seen in 2019

Sarah Shaw, global portfolio manager and chief investment officer with 4D Infrastructure, says with increasing market volatility as a result of global political tensions and signs of a slowing economy, "there has been a ‘flight to safety’ and infrastructure benefits from this as it is widely viewed as a defensive asset class."

"We believe infrastructure can out-perform in 2019, if actively managed. Infrastructure is a ‘defensive’ asset class offering investors long term visible earnings streams," she says, managing a portfolio, which invests in infrastructure assets across the globe.

Shaw identifies two distinct sub-sectors that will benefit from the current market and economic environment, in particular, utilities and user-pays assets.

"Utilities are the classic ‘defensive’ home the market seeks in tough macro environments. This is largely due to the quality and predictability of their defensive earnings which the market values highly in a volatile environment," says Shaw.

If the share market continues to correct, utilities in particular will benefit, Shaw says. “If markets continue to crumble, we would expect to see an ongoing rotation in the market into utility assets helping to deliver solid sector, especially relative, performance.

"User-pays assets (toll roads, airports, ports and rail) while still offering visible cash flows, have a direct positive correlation to the macro environment so should perform well in buoyant macro environments,” she says.

RARE Infrastructure too likes utilities. In terms of the RARE Infrastructure Income Strategy, 77 per cent of the portfolio is in more defensive regulated utilities (electric, gas and water) while 18 per cent is in the more economic growth sensitive, user-pays infrastructure stocks (ports, toll roads and telecommunications towers).

"While future performance cannot be guaranteed, as at 30 September 2018, the Strategy’s expected five-year annualised return was 12.8 per cent, demonstrating the depth and breadth of opportunities for the strategy," according to a recent portfolio report.

is a Morningstar contributor.

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