The hunt for yield has been one of the dominant themes over the past few years, as investors look to generate higher returns from their assets in the face of weak global economic growth.
As we wrote in July 2016, the share prices for high quality, stable dividend-paying companies has led investors into infrastructure stocks in their droves. That includes the likes of Transurban Group (ASX: TCL), Sydney Airport Holdings Ltd (ASX: SYD) and Macquarie Atlas Roads Limited (ASX: MQA).
Over the past 12 months, the share prices of the three stocks above have soared 11%, 15% and a whopping 45%.
Even Auckland International Airport Ltd (ASX: AIA) has seen its share price zoom higher – rising more than 61% in the past year.
But one factor that has helped infrastructure stocks over the past few years has been record low-interest rates. Generally, infrastructure stocks can make excellent use of cheap capital to reinvest back into their business, or for acquisitions, generating higher long-term returns. But when interest rates start to rise, interest costs are going to rise, earnings will fall and the amount the companies can pay out to investors could sink.
The problem is that investors are constantly looking forward, so the sell-off in the above infrastructure stocks could come sooner and happen faster than many thought – well before interest rates start rising.
And US interest rates could well be about to rise given recent comments by a number of US Federal Reserve officials.
In July this year, veteran fund manager John Murray of Perennial Value Management, noted that Transurban, Sydney Airport and CSL Limited (ASX: CSL) were trading on extreme valuations and he was looking elsewhere for value.
Since then, the share prices of the three companies have fallen by 14%, 12% and 14% respectively.
If interest rates are going to rise – and at some stage, they most definitely will – shareholders could see the likes of Transurban’s share price plunge.