Infrastructure is a defensive asset class and so tends to perform relatively well in difficult economic times. But the COVID-19 pandemic has had very different effects on various infrastructure sectors. Some, such as utilities, have seen a small and temporary drop in demand in the geographies most acutely affected by the virus. Others, such as telecommunications and oil storage, have actually benefited from the crisis with rising demand. At the other end of the spectrum, air travel and airports have experienced significant disruption.
Airports and air travel
During the most intense phase of the crisis, from March through May, air travel nearly ground to a halt. Volumes dropped sharply globally, with little differentiation by region. There has been a mild rebound since then, and volumes remain well below pre-crisis levels. To be sure, cargo volumes have held up well,[1] supported by a relatively healthy goods sector globally. Domestic passenger volumes have also come back more than international travel, particularly in countries more successful at containing the virus. Still, overall operating conditions remain challenging.
With infections rates rising again and additional movement restrictions instituted for many areas, the first half of 2021 is likely to continue to be a difficult environment for many airports, particularly those with more international travel traffic. But if a vaccine is made available and production scaled up quickly, the second half could see a steady return of volumes.
Tolls, roads, and ports
Road volumes have also been heavily affected by the virus, but in contrast to air travel, volumes have rebounded quickly and robustly. Car travel is relatively safe from a virus point of view (exposure is limited to a small number of people, generally from individual households). There is probably a substitution effect occurring as people shift from air travel and choose domestic holidays over international ones, driving rather than flying to their holiday destinations.
Port volumes have, as they usually do, followed the broader economic cycle. After a sharp fall in the second quarter, port volumes around the world rebounded strongly in the third quarter.[2] The relative strength of the goods sector globally has also been a factor helping to support trade.
Looking to 2021, much will turn on the economic cycle. With the first quarter of 2021 potentially seeing a strong rebound from some virus-induced weakness in the fourth quarter of 2020, we would expect road and port volumes also to improve at the start of the year. Beyond that, we expect growth to moderate to more normal levels over the remainder of the year. If the economic outlook turns out to be different from our base case, however, the profile for these two sectors is also likely to be different.
Electricity and gas sectors Demand for electricity and gas tends to be resilient to economic downturns and so it has proved through this downturn despite its atypical nature. Only areas that have been acutely affected by the virus – such as Italy, Spain, and New York– saw any shortfall in demand and even in these places, the shortfall was small relative to the state of overall economic activity and was also short lived, with demand returning to normal levels quickly. (Source: International Energy Agency, November 2020.)
The economic effects of a second wave may be less given less severe lockdown measures, and economic agents becoming increasingly acclimatized to the restrictions. Given this, we expect electricity and gas demand likely to remain at, or very close to, normal levels through 2021 in most countries around the world. Specific locations could, however, be affected if they were to see a pronounced surge in cases and tight lockdown measures were applied. Even so, given the experience of 2020, we would expect demand shortfalls in such situations to be relatively mild and not long lasting.
Telecoms and oil storage
Both the telecommunications and oil storage sectors benefited from COVID-19. With many working, playing, and learning from home, demand for data increased and the importance of a good fiber optic connection was enhanced. Demand for oil storage also rose as demand for refined product fell away but the supply of crude remained strong courtesy of the price war between Russia and Saudi Arabia.[3] For telecoms, we think demand could remain high in early 2021 if the recent surge in cases leads more people to work from home during that period. We also believe more will work from home more often in a post-COVID-19 world, so this crisis has likely reinforced the strong growth in this sector.
So while there should be important differences by sector in 2021, we believe infrastructure as a whole should continue to show its resilient qualities next year.
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[2] Ibid.
[3] Ibid.
The views expressed represent the investment team’s assessment of the market environment as of December 2020, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice.
Investing involves risk including the possible loss of principal. Past performance is
not a reliable indication of future performance.
Securities
issued by companies principally engaged in the infrastructure industry have
greater exposure to the potential adverse economic, regulatory, political, and
other changes.
[compliance: 1428021]
Macquarie Asset Management is an Associate member of TEXPERS. The views expressed in
this article are those of the authors and not necessarily MAM nor TEXPERS.
Daniel McCormack is an economist and market strategist with Macquarie Infrastructure and Real Assets, based in London. He partners with several real asset investment teams at Macquarie, conducting analysis that helps managers and their clients plan for the use of alternative-asset investments.
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