By Tyler Wilton, DWS

Our unique approach to infrastructure investing is focused on “pure-play” infrastructure, where the majority of company value is derived from owning and operating physical assets that are essential for economic or social needs. A “pure-play” focus is essentially designed to replicate investment characteristics of private (i.e. direct) infrastructure investing (read more on pure play companies: Infrastructure investing 101).

The “pure-play” listed infrastructure asset class provides investors a unique opportunity, such as:

  • Strong absolute and relative long-term performance
  • Attractive and stable dividend income
  • Low volatility compared to other cyclical asset classes
  • Liquidity and diversification; low overlap compared to broader global equity markets
  • Direct and indirect inflation hedge

Infrastructure outlook & relative valuations

From a macro perspective, we believe the probability of a recession is unlikely, but the current cycle may be approaching “overextended” territory. The chart below highlights where the current recovery stands in the context of the overall economic cycle compared to previous post-recession recoveries since 1953 for the S&P 500 Index. The chart below suggests that the late cycle economy we are in today may potentially reduce forward-looking equity returns (according to the historical trend-line), which supports shifting a portfolio towards defensive equities such as infrastructure.

Turning to valuations, infrastructure appears attractive compared to broader equities as seen in the chart below. Infrastructure has typically traded at a premium to traditional equities. Current valuations relative to broader global equities have not been this narrow since 2009, suggesting infrastructure may be attractive from a valuation perspective. The current spread of +67 basis points (bps) is well below the historical average spread of +129 bps.

Data as of 6/30/18. Source: Factset, Bloomberg, DWS. 
Global Equities = MSCI World Index; Global Infrastructure = Dow Jones Brookfield Infrastructure Index

Overall, we expect global economic growth to decelerate over the near-term coupled with the potential for higher inflation. Global economic growth has been relatively stable thus far, but we expect this momentum to fade as we move forward, given key economic indicators, such as global PMIs, may be suggesting that the synchronized global expansion is losing steam. Even if a market correction does not occur, we believe there is a place for listed infrastructure in a portfolio — especially for investors concerned about inflation– given that infrastructure has historically been able to withstand rising prices better than other equity market segments.