The defensive themes to watch as demand comes roaring back

Almost every other week, it seems, another Australian large-cap stock is implicated in M&A activity. In some cases, such companies ultimately disappear from the ASX entirely.

Utility firm Spark Infrastructure (ASX: SKI) is one of the most recent, the $5 billion company set to de-list after being scooped up by private equity giant KKR. AusNet (ASX: AST) is also going private after being taken out by Brookfield, and Sydney Airport (ASX: SYD) may soon vanish from the ASX boards, too.

“There’s not a lot left…we have gradually lost most of the listed infrastructure opportunity set out of the Australian market,” said Sarah Shaw, global portfolio manager of 4D Infrastructure, during a webinar yesterday.

She estimated there are currently less than 10 pure-play regulated utility and infrastructure firms currently listed on the ASX, including:

• APA Group (ASX: APA)
• Atlas Arteria (ASX: ALX), and
• Transurban (ASX: TCL).

“The reason we’re losing our listed infrastructure assets is that they’re cheaper than direct infrastructure assets, and there are huge pools of capital looking for these, whether in an unlisted fund, super funds or other structures,” Shaw said.

“The competition for assets between those funds is huge, valuations are very strong globally, and they’re turning to our listed assets because you get high-quality assets and a much cheaper valuation, and they’re taking them private. That’s the risk we have in the listed infrastructure space when the valuation differentials are so significant.”

For the likes of 4D Infrastructure and Quay Global Investors, a listed property fund manager that’s also part of the Bennelong Funds Management stable of boutique asset managers, this trend is positive. Their economies of scale and greater access to global markets – combined with the higher premium on unlisted assets – highlight the value of listed asses in these defensive sectors.

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4D Global Infrastructure Fund (Unhedged)

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"The biggest theme in real estate"

Chris Bedingfield, principal and portfolio manager at Quay Global Investors, concedes there are many parts of the listed property sector that are now overvalued.

“The biggest theme in global real estate right now is a classic capture of what’s happening in the global economy. Everyone’s talking about inflation and supply chain issues, with real estate one of the best examples of this,” he said.

In response to the long-running monetary stimulus measures rolled out by governments across the developed world, demand has come rushing back. But at the same time, the supply side has been held up.

“You’re getting a huge mismatch, with very strong rental growth and also areas where that demand has come back, which is driving enormous profit growth and earnings per share growth right across the sector,” Bedingfield said.

Touching on the inflation debate that continues to fixate market watchers, he sits in the transitory camp.

“The whole argument about transitory versus permanent inflation, from a real estate perspective, there is supply coming,” he said.

And when it does, we’ll see some softening in housing growth. It won’t happen until probably the middle of next year, but it’s coming.”

Which areas appeal for 2022?

Retail is one of the key sectors where he sees investment opportunities, bricks-and-mortar shopping centres back in favour as lockdowns subside.

Before the pandemic hit, markets were writing off physical retailers as dinosaurs destined to be swallowed up by e-commerce. But in the US and elsewhere, there has since been a resurgence. Bedingfield referred to the recent record revenues from Simon Property Group in the US, the world’s largest retail landlord. Its sales for third-quarter 2021 were around 8% higher than the same period in 2019.

“And we’re seeing some of the same trends in Australia with Scentre Group (ASX: SCG),” he said.
“The consumer is going to come roaring back, not only in e-commerce sales but also bricks-and-mortar.”

Bedingfield drew a stark comparison between the “hard-running” equity markets around the world, where valuations look increasingly stretched, and the retail sector.

“Yet you can still buy shopping centre landlords at deep discounts compared to where they were pre-COVID”

For example, SCG was trading at just over $3 a share at the close on Tuesday, with a book value of around $3.80 a share. The stock was trading at $4 in January 2020, before the pandemic hit.

“A tsunami of grey hair”

Another area he highlighted is the ageing demographic, with senior housing an appealing thematic, especially in North America. By 2025, the first of the Baby Boomers cohort will turn 80, which is the average age at which people move into retirement villages and other senior-targeted living arrangements.

“We’ve got this perfect scenario of limited supply over the next three to four years and a tsunami of grey-haired retirees and other aged occupants moving into the space.”

But as both Bedingfield and Shaw emphasised during their presentations, they’re cautiously selective. Industrial and logistics REITs present a red flag for Bedingfield now.

“It’s had every single break in its favour over the last few years, whether it was e-commerce, then the COVID shutdowns and now supply chain disruptions. But valuations are very enthusiastic so it’s probably the area we’re most cautious on,” he said.

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Quay Global Real Estate Fund (Unhedged)

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Quay Global Investors and 4D Infrastructure are Bennelong Funds Management boutiques. For more information, click the 'CONTACT' button below.