2021 saw robust equity market returns, with new leadership from 2020’s laggards, such as the energy and real estate sectors. Throughout 2021, global equity market earnings supported stocks—ultimately, equities delivered ~45% earnings growth, compared to initial expectations of 26%.1 Against this backdrop of a cyclical rebound and accelerating global earnings, infrastructure lagged, delivering a ~10% earnings increase vs. original expectations of 8.8%. Infrastructure earnings are durable and low-beta, but they are not suited to outperform during a cyclically-charged rebound.
Looking into 2022, we believe infrastructure earnings are likely to outpace global earnings for the first time in several years. Broad equity market earnings are set to decelerate while infrastructure maintains strong growth. We forecast 10% earnings growth compared to broad equity market growth of only ~7%.2 Global market revisions are moderating (they peaked in Q2 2021) and the pace of broad economic growth is slowing. Gross domestic product (GDP), industrial orders, consumer confidence, and other macroeconomic variables are healthy, but they are unlikely to improve at a faster rate in 2022 than they did in 2021.
Historically, moderating economic growth has been a positive for infrastructure. During such periods, infrastructure has delivered an ~18.5% annualized return, outpacing global equities by 5%. Moreover, during periods of above-average inflation (whether inflation is rising or falling), infrastructure has outperformed global equities by a range of 7-9% based on annualized returns. With these macro factors combined, 2022 is setting up well for the asset class.
On a fundamental basis, infrastructure’s inflation-protected cash flows are accelerating because of its essential characteristics. Companies within global utilities are building hundreds of gigawatts of wind and solar to ensure a clean energy future; such installations hit a new record in 2021, and they are essential to provide power independent of volatile (and expensive) commodities like coal. In the communications sector, secular growth in data from cloud proliferation and the still nascent 5G build-out supports the outlook for data centers and cell towers. The midstream sector should benefit from return of global economic activity that supports energy demand and volumes on existing assets. There is very limited opportunity for the companies to invest in new infrastructure, which should lead to further consolidation and return of capital focus across the group. In transports, toll roads, rails, and airport networks should continue to see steady and growing recoveries in traffic post-pandemic. In the coming years, the world will become more immune, and more normalized, to COVID and its variants: as such, global transportation infrastructure is one of the few remaining COVID recovery stories for 2022 and beyond.
The combination of secular growth, from decarbonization, asset modernization, and digital transformation, and cyclical recoveries is occurring just as the listed infrastructure market is trading at a generational-level discount against global equities. Currently, infrastructure is trading 10% below its long-term relative multiple average; this is similar to 2010, when global economic growth also moderated, and just before a multi-year period during which infrastructure outperformed global markets.
For 2022 and beyond, we are optimistic that past is prologue. Infrastructure’s relative valuation multiple is a coiled spring for the asset class. When coupled with its robust dividend yield, inflation protected earnings growth, and history of outperformance during moderating and inflationary environments—we find today’s Listed Infrastructure a compelling opportunity for investors in 2022 and beyond.
Listed Infrastructure is represented by the FTSE Global Core Infrastructure 50/50 Index. Global Equities are represented by the MSCI ACWI ETF. Source: Forecasts based on the 2022 and 2023 average earnings per share growth rates of the FTSE Global Core Infrastructure 50/50 Index (CBRE forecasts) and the MSCI ACWI ETF (Factset), respectively; actuals per Factset. As of December 21, 2021. Past performance is not indicative of future results. An investment cannot be made in an index.
1. Source: Factset for the ACWI ETF.
2. Based on the 2022 and 2023 average EPS growth rates of the FTSE Global Core Infrastructure 50/50 Index (CBRE forecasts) and the MSCI ACWI ETF (Factset), respectively.
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Beta is a measure of how an individual asset moves when the overall stock market increases or decreases.
The information presented herein is current as of the date of this report, unless otherwise indicated. Any forward-looking statements are based on assumptions concerning future events and although we believe that the sources used are reliable, the information contained in these materials has not been independently verified and its accuracy is not guaranteed. The information discussed is strictly for illustrative and educational purposes and is not a recommendation, offer, or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any information discussed will be effective or that any market expectation will be achieved. This information should not be relied upon by the reader as research or investment advice regarding any funds, financial products, or any particular issuer/security This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial professional before making any investment decision.
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