Utility companies with resilient earnings and cash flow offer investors the potential for greater stability until fundamentals emerge once again as the key driver of stock prices.
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: how to allocate in this uncertain environment?
Investing in global listed infrastructure allows investors to navigate market volatility while still remaining in equities. For example, the infrastructure companies that RARE favors earn their revenue under regulatory structures or long-term concession contracts, leading to a relatively 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.
Source: 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 Universe, Local, FactSet Research Systems (FactSet code: CLIENT: Yield Universe). Past Performance is no guarantee of future results.
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, a focus on utility sectors where arnings are linked to the underlying asset base rather than the economic cycle may further limit the impact of economic downturns. 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 in effect “paid to wait” as companies continue to pay attractive and growing dividends.
COVID-19 is the World Health Organization's official designation of the current coronavirus disease.
The MSCI All Country World Index (ACWI) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets.
The MSCI World Index captures large and mid-cap representation across 23 Developed Markets countries.
The RARE Income Universe includes a specific group of income stocks covered by RARE Infrastructure.
The RARE Infrastructure Income Universe includes a specific group of infrastructure income stocks covered by RARE Infrastructure.
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