Varun Anand's Top Picks: December 1, 2021
BNN Bloomberg
Top picks from Varun Anand, vice president and senior portfolio manager, Starlight Capital
Varun Anand, vice president and senior portfolio manager, Starlight Capital FOCUS: Infrastructure stocks
MARKET OUTLOOK:
Financial conditions globally are tightening as the U.S. Federal Reserve, the Bank of Canada and the European Central Bank are in the process of tapering bond purchases. As the tapering process unfolded in 2014, short and intermediate borrowing rates rose, increasing borrowing costs for consumers and businesses.
The leverage in the capital structure of many infrastructure businesses makes debt service a large component of their cost structure. With long bond yields consistently below 3 per cent and forecast to remain so, infrastructure assets have extended maturities and locked in low cost structures for years to come.
As global economies re-open, the occupancy and utilization of infrastructure businesses are both set to rise, driving margin expansion and free cash flow generation. The essential nature of the services provided by real asset businesses (power, communications, logistics, transportation) allows for the pass through of wage and input inflation for infrastructure businesses that are exposed to these variables.
Infrastructure assets also stand to benefit from the numerous structural drivers of performance that existed prior to the pandemic. Transport infrastructure continues to benefit from the rise of e-commerce, while immigration and household formation supports utility businesses and waste collection. Streaming and social media continue to drive the demand for cell towers and data centres while a global focus on reducing carbon emissions continues to fuel the need for renewable energy development. These macro trends support strong infrastructure returns in 2022.
