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Beyond bricks and mortar

Infrastructure continues to be a particularly interesting segment. Caution is needed, however, in selecting the correct sectors to invest in.

Infrastructure is en vogue, and not just among policymakers on both sides of the Atlantic. For the past few years, listed U.S. infrastructure companies have enjoyed a premium compared to the broader market. Currently, the Dow Jones Brookfield Global Infrastructure Index trades at a trailing price-to-earnings (P/E) ratio of 24, compared to 18 for the S&P 500 Index.

This partly reflects the allure of high dividend yields. Compared to low-yielding bonds, the sector has an added advantage. Overall, infrastructure earnings tend to track nominal economic growth, offering potential protection against rising inflation. The higher P/E ratios may reflect earnings stability and higher dividends. The key risk to the asset class could result from an unexpected increase of inflation-adjusted interest rates.

In the current environment, tower companies as operators of wireless base stations for telecoms carriers benefit from secular data growth. As always, the devil is in the detail, including the impact of technological changes, such as the continuing growth of low-powered radio access nodes. Against the backdrop of stable gross-domestic-product growth and slightly higher inflation, we also have a favorable bias towards rails in light of sequential improvement in volumes. However, the real question is which rails are best positioned, requiring thorough attention to underlying business dynamics.

Another way to look at infrastructure valuations

At 3.6%, the average dividend yield for listed U.S. infrastructure is almost 200 basis points above 10-year Treasury rates. This spread is well above the long-term average.

Source: Bloomberg Finance L.P.; as of 9/1/16

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