Core Infrastructure Behavior In A Rising Inflation Expectations Environment

Summary

• It is interesting to observe the behaviour of Core Infrastructure and various ways to gain exposure to it: fixed income, multi-asset and equity.
• After initially losing nearly 10% at the end of March 2020, the FTSE Fixed Income Core Infrastructure index bounced strongly, returning almost 20% since the March lows to the end of 2020.
• Fixed income infrastructure bonds have underperformed their infrastructure multi-asset peers, however.

Sitthiphong/iStock via Getty Images

By Sergiy Leysk, Director, Research

The arrival of inflation, dilemma of whether it is transitional and possible response strategies by bond investors have been covered in our recent blog (Inflation, the unwelcome house guest: here to stay or just passing through).

One of those is a decreasing duration strategy, which shifts from the longer end, to the shorter end of the curve. Figure 1 demonstrates how rising inflation expectations impacted bonds of different duration. Since the start of the crisis, the Treasury bonds of medium duration (3-7 years) fluctuated in a narrow band of 2-3%, while the longer bonds fluctuate widely from rising 10% in July 2020 then losing more than 20% by March 2021 and eventually settling at 3% loss by the end of October 2021.

Against this backdrop, it is interesting to observe the behaviour of Core Infrastructure and various ways to gain exposure to it: fixed income, multi-asset and equity.

The fixed income core infrastructure has performed well. After initially losing nearly 10% at the end of March 2020, the FTSE Fixed Income Core Infrastructure index bounced strongly, returning almost 20% since the March lows to the end of 2020. It was range bound in 2021, eventually producing 6% since the start of the Covid-19 crisis, outperforming medium and long-term US treasury bonds by 5% and 9% respectively, as per Figure 2. The main reasons are that the inflation boosted the asset base of infrastructure companies and their inflation-adjusted revenues, solidifying the financial position of infrastructure companies.

Fixed income infrastructure bonds have underperformed their infrastructure multi-asset peers, however. As Figure 3 shows, the FTSE Global Core Infrastructure Index outperformed the FTSE Fixed Income Core Infrastructure Index during an environment of rising inflation expectations.

With the view that inflation is transitory weakening, market participants should be aware that equity and multi-asset infrastructure indexes have historically tended to outperform equivalent bond indexes in inflationary periods.

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