Infrastructure assets gave back some of the year’s gains in the final quarter of 2019 as rising bond yields curbed DCF valuations, but still registered strong gains over the whole year. That’s the message delivered by EDHECinfra’s latest quarterly report on the performance of unlisted global infrastructure, its unique and far-ranging index of global unlisted infrastructure equity assets.
The EDHECinfra Global Equity Index fell 2.58% to 5228 points by year end, though that still represents a year-on-year gain of 14.06%. The average global infrastructure equity premium is now slightly less than 5%, down from 5.5% two years ago and 8-9% before 2012.
“The last quarter reminds us that infrastructure equity is highly exposed to interest rate risk” explained Abhishek Gupta, Investment Solution Specialist at EDHECinfra. “You can see this in the index’s 16-year duration.”
Strong performers were supported by cash flow growth or their more robust, contracted business model. For instance, the IH-635 PPP road project in the US showed a steady increase in revenues, yielding Q4 returns of 1.4% (5.6% pa), also reflecting the more robust performance of the contracted project segment of the market
Merchant assets, such as independent power producers and toll road companies performed well, as their relatively higher risk premia made them less impacted by higher long-term yields in many markets. Revenue growth continues to increase in the power sector and on average now tops 2%. In the road sector, meanwhile, it is decreasing but still stands at an average of about 3% pa.
Six out of the bottom 10 performers were based in New Zealand companies, while some 10 out of the bottom 20 were regulated utilities and airports. The infrastructure sectors most exposed to interest rate risk are dominated by large, long-lived corporates
Some regulated UK water utilities also made the list of worst performers: Affinity Water returned 3.6% in the quarter (-13.6% pa). South East Water also slumped -3.6% (-13.6% pa) after announcing a new impairment and a substantial cut in its financial forecasts.
True to form, almost all the best returns in Q4 came from Emerging markets. Brazil and Filipino companies, were amongst the top performers, aided by higher risk premia and a series of central bank rate cuts.
EDHECinfra Indices are available at indices.edhecinfra.com.