A multi-trillion-dollar opportunity: 1 theme and 2 stocks on 4D's radar

Australia alone is set to pour more than $15 billion into roads and railways, power grids, waterworks and communications infrastructure over the next decade. This number pales against the US$1.2 trillion US Infrastructure plan signed off by US Congress last November.

This represents an “absolutely fantastic” opportunity for investors, according to 4D Infrastructure’s Sarah Shaw.

“Many of the huge stimulus programs around the world are focused on infrastructure and in particular, the energy transition,” Shaw said.

“There's a huge multiplier effect of infrastructure investment, which flows into employment and economic recovery. Governments recognise that. So it enhances that that need to spend."

Though many of these assets are traditionally unlisted, governments are increasingly looking to the private sector to help foot the bill. This is mainly because public balance sheets remain so stretched after the massive (and very necessary) investment in stimulus and social infrastructure since COVID hit in 2020.

In the following interview, Shaw explains the scale of the opportunity and highlights a thematic her team is most excited about. She also reveals two European stocks – a utility and a communications tower company – that have captured their attention.

Edited transcript

Is there an opportunity cost to just investing in listed infrastructure, given so many infrastructure assets are unlisted?

Sarah Shaw: Just investing in stocks, possibly. So, we believe that listed and unlisted infrastructure are actually quite complimentary allocations. In many cases, we’re looking at the same types of assets, and in some cases exactly the same assets, with some assets owned by both the listed market and by unlisted equity funds.

Transurban's a great example, its US roads portfolio is owned by the company itself and also by unlisted infrastructure investors. There are other assets that move between the listed and the unlisted space.

Is there an opportunity cost? I don't think so. I think they are completely and utterly complementary.
And I think having both listed and unlisted in a balanced infrastructure allocation gives you greater diversity and opportunity.

And what I mean by that is there are certain assets such as social infrastructure that are much more prevalent in the unlisted market. We don't get a lot of opportunities for social infrastructure in the listed market.

But by contrast, there's more opportunity in certain sub-sectors in the listed market, such as US regulated utilities. US regulated utilities are largely owned by the listed market. Greenfield assets are usually more attractive to the listed market.

And even in some of those perceived riskier markets such as the emerging markets, the listed market gives you liquidity and the ability to shift. So, having both in your allocation really allows you to get the full breadth of what the infrastructure universe offers you.

Another point I’d emphasise is that listed infrastructure gives you liquidity. Now, it also gives you volatility – the two go hand in hand because we are investing in equities that we are repriced daily.

That volatility can be incredibly frustrating for a listed infrastructure investor, but it can also be a huge opportunity to add value.

Again, we come back to March 2020 and the selloff of airports. Unlisted infrastructure investors revalued their airports, just as they should, down about 5% to 10%. We think they got it right.

But we think the listed equity market selling off 30% to 50%, got it wrong. That represented a huge opportunity for us to buy airports cheaper and to add alpha over time.

What's the stock you're most excited about at the moment?

Shaw: We’re spoiled for choice, so that’s a hard question. We're very keen on the energy transition and the de-carbonisation opportunity. We believe some of the integrated regulated utilities have a huge opportunity to invest in. Not only the renewable deployments but also in the grids to strengthen and support that renewable development.

We've got stocks that have $100 billion investment profiles over the next five to 10 years. This is a huge opportunity that we want to capitalise on. So, stocks like Iberdrola from Europe and even some out of the US are offering significant value.

Our biggest position is in a stock called Cellnex Telecom, a European tower operator. We all know what's happening with the communication space, with a huge opportunity set there for increased usage of communication data, which I think COVID highlighted more than anything.

The stock has been completely sold off in the last month or so on the whole bond proxy trade and interest rate environment. We see that offering incredible value at the moment, it's really capturing a big long-term thematic and we don't see the same inflation risk to it because its contracts are hedged.

Public-sector infrastructure investment has become a real centrepiece of recovery. How much of a tailwind is this for infrastructure?

Shaw: It's an absolutely fantastic opportunity. COVID has actually enhanced the long-term infrastructure opportunity. A lot of the huge stimulus programmes around the world are focused on infrastructure and in particular, the energy transition. There's a huge multiplier effect of infrastructure, investment into employment and economic recovery. Governments recognise that. So, it enhances that need to spend.

Governments clearly spent a lot of money on social support during COVID, as they should do, keeping their populous fed and clothed and homed. But what that means is their balance sheets aren’t very strong right now. So, they need this spending, they need this investment, they need this economic recovery. And they're relying more and more on private sector capital to help them do it. Now that's a huge opportunity for us. It's a huge opportunity for both the listed and the unlisted market.

Even if governments do it themselves, they're going to be looking to rotate that capital at some point in time, and we'll see more privatisation opportunities down the track. I think it's one of the best things for us to come out of COVID – the fast-tracking of infrastructure spend and how we and the companies that we are investing in, with their very strong balance sheets and very strong strategies – can now capitalise on that opportunity to build for the future.

Invest across the globe

4D, a Bennelong Funds Management boutique, invests in listed infrastructure companies across all four corners of the globe. For more insights on global infrastructure, click the 'FOLLOW' button or visit 4D’s website.