Several infrastructure stocks (UTF) have pulled back sharply recently, with Brookfield Infrastructure Partners (BIP, BIPC) down by 29%, Brookfield Renewable Partners (BEP, BEPC) down by 28%, and American Tower Corporation (AMT) down by 34% since the start of 2022.
That being said, I think that these sharp pullbacks create significant opportunities for long-term-oriented investors to lock in attractive current yields and long-term growth rates. As a result, the more quality infrastructure companies see their stock prices decline, the more I buy them. Here are three reasons why.
1. Smart Money Is Investing In Infrastructure
Infrastructure is one of the hottest sectors for so-called smart money to invest in right now. Leading billionaire capital allocators such as Larry Fink of BlackRock (BLK), Bruce Flatt at Brookfield (BAM, BN), Stephen Schwarzman of Blackstone (BX), and Warren Buffett of Berkshire Hathaway (BRK.A, BRK.B) are collectively pouring hundreds of billions of dollars into infrastructure investments. Even existing infrastructure companies like Enbridge (ENB) are diversifying into additional infrastructure spaces like utilities and renewable power on top of their core energy midstream infrastructure business.
Why are all of these leading players rushing headlong into this sector that the public markets seem to be eschewing right now? I do not know about you, but if this type of financial brainpower is aggressively pouring money into a sector, it definitely deserves a closer look, in my opinion. I believe they are doing it for two major reasons, which I will address next.
2. Current Macroeconomic Trends Favor Infrastructure
My personal macroeconomic view is that we are headed for a stagflationary environment where the economy slows to a crawl and potentially even enters a downturn. Meanwhile, inflation appears set to remain fairly persistently high for the foreseeable future, especially given the fact that governments, particularly the US government, are spending money with reckless abandon. Production is struggling to ramp up to increase supply to the point where it reduces costs as well. Additionally, one of the sources of deflation for the world, namely cheaply manufactured products from places like China, is being increasingly resisted by Western governments.
While the geopolitical reasons for this may make a lot of sense, and I am certainly a proponent of preserving strategic manufacturing capacity in my country (the United States), the impact of tariffs and similar measures will likely be inflationary. This is particularly the case if the current leading candidate for President in the United States – Donald Trump – gets elected, as he has proposed blanket 10% tariffs on all imports and a 60% tariff on Chinese imports.
Given these conditions, I believe that businesses that are defensive enough to weather an economic downturn while also enjoying inflation protection—and even benefiting from inflation—make for excellent investments in the current environment. Stocks like BIP, BEP, ENB, W. P. Carey (WPC), etc. with significant inflation protections from regulated assets and/or inflation-linked contracts that are defensive nature in terms of balance sheet strength, with stable cash flow profiles from long-term contracts and regulated assets, are great picks.
Moreover, while interest rates are unlikely to go back to their previous near-zero levels due to persistent inflation, I do think it is more likely than not that the Fed will be cutting rates over the next year or two. This should also serve as a tailwind for the long-term stable cash flow bond proxy nature of many infrastructure assets.
3. Enormous Need For New Infrastructure
There is an enormous need for new infrastructure in the world right now. This is due to rapid economic growth in developing economies, aging and increasingly obsolete infrastructure in developed economies, the AI boom driving significant digitization, and the need for related data infrastructure. The multi-trillion dollar effort to electrify and decarbonize the power grid is driving substantial demand for new energy infrastructure, including renewable power and nuclear energy generation. As a result, infrastructure companies positioned to grow and invest in this environment are likely to enjoy significant outperformance moving forward.
Investor Takeaway
The market is selling off infrastructure stocks due to the rapid rise in interest rates. Thus, I think that right now presents an incredible opportunity for long-term-oriented investors. They can lock in attractive income yields and very impressive long-term growth rates from quality investment-grade infrastructure companies that are poised to build and profit from the world of the 21st century. That is precisely what I am doing.
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