Power to price: Inflation, infrastructure and the social license to operate

Peter Meany

First Sentier Investors

Pricing power is now a major consideration with inflation on the rise. Equal consideration needs to be given to the social license of companies to raise prices in line with community expectations.

Some essential services might be in a better position to raise prices in line with or ahead of inflation than others, just as regulators and governments in certain regions are more open to allowing companies to mandate price increases.

Understanding how companies operate on the ground in these regions, and to what extent they are appropriately managing their social license in the eyes of regulators and society are important considerations in managing risks and opportunities within infrastructure portfolios.

Cost of living concerns in Europe, for instance, have brought new electricity tariffs and windfall profit taxes of late. Water, electricity and gas utilities are essential services that have real implications on cost of living for many.

Infrastructure companies in the United States tend to have more certainty than those in other regions such as Europe and Australia. In the US there tends to be greater separation between the political and regulatory environment.

State-based regulation tends to prevail in the US, where there are more negotiated outcomes taking into account the benefits these companies bring to economies and societies including jobs and spending.

Not all industries are created equal. Rail and waste companies have recently been able to demonstrate their strong pricing power, meaning price increases within these industries are somewhat easy to push through to match and exceed rising inflation.

Waste companies in particular have described the current pricing environment as the best they’ve seen in multiple decades, recent company visits in the US have revealed.

Other types of companies, such as toll roads operators, need to work to continually to maintain their social license within the community as inflation pushes prices up.

Introducing toll road relief for those most vulnerable to cost of living increases, or for front line workers during extra-ordinary periods such as during COVID lockdowns are good examples of a company acknowledging its position as an essential service and protecting its social license to operate.

Inflation hedge  

Infrastructure companies are considered as an inflation hedge based on their ability to increase prices in line with or exceeding their cost inflation without destroying demand.

Overall, infrastructure tends to have high barriers to entry, they’re often monopolies, such as a regulated utility, or they operate in an oligopoly market structure.

These are companies with so-called sustainable or structural rather than cyclical economic growth drivers.

Infrastructure services will continue to be used through periods of economic downturns, which makes them valuable to investors based on their ability to produce steady cash flows.

Stagflation: around the corner?

 Higher for longer inflation could result in a pullback in real economic growth and spending, opening the door for stagflation to emerge.

The combination of high inflation and low economic growth is relatively positive environment for infrastructure given the minimal impact on cash flows compared to other sectors. 

Curious to learn more about our approach to investing in property and infrastructure? 

Click here to explore further insights.

Important Information This material is for general information purposes only. It does not constitute investment or financial advice and does not take into account any specific investment objectives, financial situation or needs. This is not an offer to provide asset management services, is not a recommendation or an offer or solicitation to buy, hold or sell any security or to execute any agreement for portfolio management or investment advisory services and this material has not been prepared in connection with any such offer. Before making any investment decision you should consider, with the assistance of a financial advisor, your individual investment needs, objectives and financial situation. We have taken reasonable care to ensure that this material is accurate, current, and complete and fit for its intended purpose and audience as at the date of publication. No assurance is given or liability accepted regarding the accuracy, validity or completeness of this material and we do not undertake to update it in future if circumstances change. To the extent this material contains any expression of opinion or forward-looking statements, such opinions and statements are based on assumptions, matters and sources believed to be true and reliable at the time of publication only. This material reflects the views of the individual writers only. Those views may change, may not prove to be valid and may not reflect the views of everyone at First Sentier Investors. About First Sentier Investors References to ‘we’, ‘us’ or ‘our’ are references to First Sentier Investors, a global asset management business which is ultimately owned by Mitsubishi UFJ Financial Group. Certain of our investment teams operate under the trading names FSSA Investment Managers, Stewart Investors and Realindex Investments, all of which are part of the First Sentier Investors group. We communicate and conduct business through different legal entities in different locations. This material is communicated in Australia and New Zealand by First Sentier Investors (Australia) IM Limited, authorised and regulated in Australia by the Australian Securities and Investments Commission (AFSL 289017; ABN 89 114 194311) To the extent permitted by law, MUFG and its subsidiaries are not liable for any loss or damage as a result of reliance on any statement or information contained in this document. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment products referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk, including loss of income and capital invested. Peter Meany is the Head of Global Listed Infrastructure at First Sentier Investors. Kate Turner is the Deputy Global Head of Responsible Investment at First Sentier Investors. © First Sentier Investors Group

Peter Meany
Head of Global Listed Infrastructure
First Sentier Investors

Peter established the Global Listed Infrastructure Securities strategy in 2007 and has more than 20 years' investment experience. Prior to joining CFSGAM, Peter was a Director and Head of Infrastructure and Utilities Research at Credit Suisse...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.


Sign In or Join Free to comment