Global Infrastructure: March 2020 Quarterly Commentary


The quarter was dominated by fear associated with the Covid-19 pandemic which spread across the globe. The collapse of the OPEC-Russia agreement on oil production controls at the beginning of March exacerbated market falls further as oil prices went into free fall.

The world has endured recessions before, but we have no statistical records of a period where the economy is deliberately closed to slow the speed of a virus. So, we are in uncharted territories. Although this shut down is likely to be only for a relatively short period, governments throughout the world are well aware of the potential long-term harm this could do without substantial government intervention. Many western governments have moved very quickly to put in place measures to ensure companies have access to government guaranteed loans to businesses, income support for staff laid off because of the shutdown and provided substantial liquidity to financial markets.

Stock markets fell heavily as a pandemic became inevitable. By 20 March the S&P 500 had already fallen over 30%. The quickest bear market in history from the peak. Since then we have seen unprecedented and speedy support packages from all the major western economies. These will provide quick and immediate relief to many parts of the economy whilst the virus runs its course.

The Infrastructure universe includes a wide variety of industries and companies. The oil and gas related assets such as pipelines, and gas utilities were particularly hard hit. The oil price is not sustainable at $20 a barrel – either a new production cut agreement is made between Saudi Arabia and Russia or oil production is reduced across the world as it is simply unprofitable for many producers at this price – particularly USA shale oil.

With many businesses simply not operating they have to focus on cash flow to ensure they can pay their fixed costs. As such many companies have cancelled the payment of dividends until further notice. The Global Infrastructure fund holds many utilities and other vital companies such as mobile operators, internet service providers, and so dividend cuts are less likely, but even electricity consumption is down in the order of 10% post the lockdown. So many of the companies in the global Infrastructure space will become relatively more attractive to investors seeking income, until clarity of dividend resumption from the rest of the market improves.

Although we are all hopeful that this period of total lockdown will be relatively brief, it is likely to have profound long-term effects for so many aspects of life. Governments and companies will have to diversify their supply chains and become less dependent on one source such as China for vital inputs. Countries will have to onshore vital production of far more products like medical equipment, diagnostic testing, basic chemicals, etc. Countries will have to secure their borders better to limit the risk of the spread of diseases. Globalization that has been an ever-increasing trend for the last 30 years is likely to go in to reverse and this will have profound implications for so many things we have only just begun to think about.

Governments’ attempts at keeping the economy alive is costing an awful lot of money – being paid for by even more debt or simply money printing. This will have a significant negative impact for future global growth – debt repayment and interest service costs will limit government spending going forward. We will see a reversal of ever lowering corporate tax rates across the world - so corporate profits growth will be hit.

However, economies cannot be shut down indefinitely without causing lasting damage. So as the virus spread slows governments will have to devise exit strategies from the lockdown. This is likely to happen in stages, so any notion that we will have a rapid bounce back from this crisis is likely to be misplaced. Consumers and companies have been psychologically shocked by this event so spending is likely to be cautious. So, we should not expect a big bounce back in big ticket items like autos, house purchases (and all its related activities), travel and tourism, etc.

There will also still need to be significant boosts in government fiscal spending to help kick start the economy – the current economic measures are mainly focused on keeping companies alive and jobs open, not boosting demand. Infrastructure in many western countries has been neglected for a long time, so we expect Infrastructure to be a key focus for government expenditure and we will be looking to take advantage of this spending through the fund.

Of course, the world will survive this, and human beings are good at finding solutions to problems. A vaccine will arrive and in future we will learn to speed up the time lag in producing a vaccine for when the next virus comes along. This event will end up having cost the world an enormous amount of money and there will be a lot of soul searching and decisions to be made about how the world can mitigate the cost (both human and monetary) of such an event again. These changes are likely to be profound.

Our performance remains sound:

Periods ended 31 March 2020 1 Months 3 Months 1 Year 2 Years Since Inception
Portfolio* -8.97% -8.03% 5.01% +13.62% +14.03%
Benchmark^ -9.03% -6.60% +4.15% +12.72% +8.87%
Active -0.07% -1.54% +0.82% +0.80% +4.74%