Building the way to recovery
Infrastructure is being affected by the fall-out from global lockdowns and travel bans. But new challenges also bring opportunity, according to Mellon’s infrastructure manager, Jim Lydotes.
Europe has seen the most extensive decline in air services of any world region over the past two months, with the number of scheduled flights down 68% compared to this time last year.¹ Unsurprisingly, levels of public transportation use have also plummeted. In the UK alone, Covid-19 has wiped out 73% of road travel, falling to a level the nation has not seen since 1955.² These are among the many issues infrastructure has had to face as an asset class this year.
Instead of focusing on the negatives, Jim Lydotes, senior portfolio manager of the BNY Mellon Global Infrastructure Income strategy, sees upside coming from this unprecedented time in financial history. “We’ve seen 12 years’ worth of volatility in the 12 weeks through the end of May and, as active managers, volatility isn’t necessarily a bad thing since it creates disruptions we can try to capitalise on,” says Lydotes.
With the unexpected changes of the past few months, Lydotes has been opportunistic over this period, shifting his portfolio to be more defensive stance as well as to capture new ideas. For example, the weighting to US utilities has moved from 10% at the start the year to 30% by the end of April. “These are some of the most defensive and highest quality infrastructure assets on the planet and we’re amazed at the levels they got down to in the early part of March,” says Lydotes.
Lydotes also added to holdings in the European transportation space. Prior to Covid-19, toll road businesses had been viewed as some of the highest quality and most visible assets for infrastructure investing according to his research, he says but notes this also meant they traded at very high multiples.
As people were locked in their houses and not on the roads, for the first time ever, toll traffic ground to a halt. “Investors in these assets have never had to deal with volatility like this. A great deal of uncertainly arose and some of these equity values were cut fully in half,” explains Lydotes. Taking advantage of the falls, Lydotes allocated over 1,500 basis points to this sector – his highest exposure to this area of infrastructure in almost five years.
Despite this year and most likely next year witnessing much weaker-than-normal levels of traffic, Lydotes believes this space still holds future promise.
“If you consider the multiple decades’ worth of cash flows in such assets coming in the future (and the strong balance sheets for the select few we invested in over the period), I believe the dislocation was a great opportunity,” he says.
The next new deal?
In the same way that President Roosevelt shored up the US economy during the Great Depression era with his New Deal, Lydotes believes governments around the world will rely on infrastructure projects to help with their economic recovery efforts. He expects infrastructure sectors will see an uptick in growth as a result.
Large-scale infrastructure projects typically involve large scale job programmes, which should get people back to working or offer new employment opportunities, he notes.
Lydotes has also been talking with Italian and Spanish companies who have indicated they are already in conversation with government officials on pushing forward with larger buildout plans, a concept which Lydotes believes will gain momentum globally.
Looking ahead to the fast-approaching US presidential election, Lydotes sees infrastructure being a hot topic for the candidates. In the 2016 election it was one of the few areas of common ground between the two parties. “Given the chronic state of disrepair we see in the US infrastructure space today, and the seemingly endless willingness of the US government to stimulate the economy with fiscal spending right now, we think this is going to be, yet again, probably the sole area where both mainstream candidates will agree on headed into the November US elections,” says Lydotes.
As with all other financial sectors, the coronavirus pandemic has altered infrastructure investing globally, but investors can either view the given circumstances as a weakness or a way to explore new thoughts, ideas and avenues in this asset class. In Lydotes’ view, choosing to embrace change allows for more profitable opportunities than fearing the unknown.
¹OAG.com ‘Coronavirus’, 26 May 2020.
²The Guardian: ‘UK road travel falls to 1955 levels as Covid-19 lockdown takes hold’, 26 May 2020