There's growing concern that we could be heading toward a recession in 2023. Inflation, while slowing, remains elevated. That's leading central banks to continue pushing interest rates higher, which could put the brakes on the global economy. A recession would negatively impact companies sensitive to the economic cycle.
However, one asset class that's built to thrive in the current environment is infrastructure. Sam Pollock, the CEO of Brookfield Infrastructure (BIPC +0.00%) (BIP 2.39%), made a case for investing in infrastructure in his company's recent investor letter. Here's why he believes it's best suited for the current environment.
NYSE: BIPC
Key Data Points
The case for infrastructure
Pollock wrote:
Investing in infrastructure assets provides many benefits for investors seeking to manage volatility. One of the main advantages is the opportunity to participate in steady, long-term returns. Infrastructure assets such as utilities, pipelines, ports, and telecom towers are essential for the functioning of the economy and society. Investments in infrastructure, while not agnostic to the macro environment, typically perform well through all parts of the market cycle, and notably outperform during economic troughs.
As Pollock noted, while infrastructure assets aren't immune to an economic downturn, they tend to outperform in the depths of one. That puts them among the best investments for those worried that a recession is around the corner.
Pollock then detailed some of the crucial characteristics of infrastructure that showcase why it's ideally suited for the current environment:
- Highly contracted or regulated revenue. Infrastructure assets typically generate predictable cash flow backed by long-term contracts or government-regulated rate structures. That means they usually see minimal revenue decline during a recession.
- History of inflation protection. Infrastructure assets can be a good hedge against inflation, because the associated contracts often feature inflation-linked rate escalation clauses. As a result, their cash flows tend to rise along with inflation.
- Upside growth potential. In addition to those defensive properties, infrastructure also provides investors with upside potential. Volumes supported by infrastructure grow as the economy expands, enabling operators to generate increasing cash flows. They can also invest in expanding their infrastructure assets to support economic growth.
These features led Pollock to conclude that it "makes the asset class an appealing investment choice in all market conditions."
How to invest in infrastructure
Investors have lots of ways to add some infrastructure to their portfolios. Brookfield Infrastructure is an obvious choice. The company operates a globally diversified infrastructure portfolio consisting of assets in the utilities, transportation, energy midstream, and data sectors. Roughly 90% of its revenue is regulated or contracted, 70% benefits from inflation indexing, and 75% has no volume risk -- so it generates very stable cash flow. Meanwhile, growth drivers like inflation, expansion projects, and capital recycling have the company on track to grow its earnings and dividend at a healthy rate in 2023 and beyond.
While Brookfield Infrastructure offers a diversified approach to investing in infrastructure, several other companies focus on a specific segment. Three top options to consider include:
- American Tower (AMT 1.74%): American Tower is a leading infrastructure REIT that owns a global telecom tower portfolio. It also has a U.S. data center business. That portfolio puts it in an ideal position to capitalize on the growing demand for data infrastructure. Meanwhile, long-term leases supply the company with predictable revenue to support its dividend.
- Enbridge (ENB 0.54%): Enbridge is a leading energy infrastructure operator. Its pipeline-utilities business model generates stable cash flow backed by long-term contracts and regulated rate structures. That gives it the funds to pay an attractive dividend and invest in expansion, including new natural gas pipelines, utility expansions, and renewable energy projects.
- NextEra Energy (NEE 1.67%): NextEra Energy is a leading U.S. utility. It also has an energy resources segment that develops and operates renewable energy projects, natural gas pipelines, and energy transmission lines. Those infrastructure assets generate steady cash flow to support its dividend and expansion program.
Add some stability and upside to your portfolio with infrastructure
Infrastructure has historically performed well throughout the market cycle, with notable outperformance during an economic trough. On top of that, it can be a solid inflation hedge, and offers upside potential during an expansionary phase. These features make it one of the best investments in the current environment to help mute the potential impact of an economic downturn.
