Global listed infrastructure allows investors to maintain equity exposure, but with the potential for reduced volatility when markets become turbulent.
Uncertainty has become more pronounced in recent times. Global manufacturing weakness, stubbornly low inflation, low economic growth and ceaseless geopolitical tension has the world on edge.
However, while there is plenty to worry about, equities are still an engaging proposition. Yes, the probability of recession has increased. However, it’s still unlikely that the US economy, with record low unemployment, will dip into recession any time soon. Central banks are once again providing monetary stimulus, and fiscal stimulus is starting to come through. Retreating to cash or bonds runs the risk of missing out on potentially meaningful returns over the next year.
In this environment, we believe investing in global listed infrastructure allows investors to navigate market volatility while remaining in equities. This is because infrastructure companies, when selected appropriately, can provide excellent visibility over revenues and dividends driven by stable earnings of the underlying assets, regulation and long-term contracts.
A maturing business cycle means that quality assets that deliver growing earnings will be sought after and attract more capital as investors become more defensively positioned. As demonstrated by the chart below, listed infrastructure may provide downside mitigation whilst participating on the upside. Investors can also see that a shallower drawdown, can lead to an earlier recovery.
Sources: Bloomberg, MSCI, RARE Infrastructure and Legg Mason, as of 10/15/19. Infrastructure equities refer to the MSCI World Core Infrastructure Index. Global equities refer to the MSCI All Country World Index. Charts show percentage change since the start of each time period. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.
This downside mitigation can, over the long term, translate into a strategy that provides superior risk return characteristics over global equities.
Sources: MSCI and Legg Mason, as of 9/30/19. Sharpe ratio based on gross monthly returns of the respective index and the risk-free rate of ICE LIBOR One Month. Infrastructure equities refer to the MSCI World Core Infrastructure Index. Global equities refer to the MSCI All Country World Index. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.
The Bottom Line
The global economy has slowed in 2019. Trade tensions have increased the risk of economies slipping into recession. On the other hand, we have synchronised monetary stimulus starting to be joined by fiscal stimulus. What’s more, low inflation along with low bond yields would suggest equities could still do well.
Going forward, global listed infrastructure allows investors to remain invested in equities whilst having the peace of mind that they have some defence built into their portfolio.
ICE LIBOR refers to the Intercontinental Exchange London Inter-Bank Offered Rate, which is an interest-rate average calculated from estimates submitted by the leading banks in London.
The MSCI All Country World Index captures large and mid-cap representation across 23 Developed Markets (DM) and 26 Emerging Markets (EM) countries*. With 2,852 constituents, the index covers approximately 85% of the global investable equity opportunity set.
The MSCI World Core Infrastructure Index captures large and mid-cap securities across the 23 Developed Markets (DM) countries*. The Index is designed to represent the performance of listed companies within the developed markets that are engaged in core industrial infrastructure activities.
Morgan Stanley (MS) is an American multinational financial services corporation headquartered in the Morgan Stanley Building, Midtown Manhattan, New York City.
Sharpe ratio is a risk-adjusted measure of investment return. The higher the Sharpe ratio, the better the fund's historical risk-adjusted performance.