ASX shares involved in infrastructure are back in vogue due to the current macroeconomic and geopolitical climate.
That's according to ClearBridge Investments portfolio manager Charles Hamieh, who said investors are turning to such stocks to counter rapid interest rate rises and rampant inflation.
"This is because infrastructure returns are driven by investment plans in essential services, which span 10 or more years into the future, accelerate over time, and provide considerable predictability compared to more volatile equities," he said.
"The relative predictability of infrastructure returns is delivered by regulated and contracted assets, which are our focus as we build infrastructure portfolios."
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Two attractive features of infrastructure shares
Hamieh reckons infrastructure offers a couple of advantages that are well-suited to the current global environment.
"First, infrastructure works as an inflation hedge," he said.
"Infrastructure's pricing power comes from the essential nature of its assets: even at times of economic weakness, consumers continue to use water, electricity and gas; drive cars on toll roads, and use other essential infrastructure services."
Even better is that infrastructure providers often have long-term contracts with their clients.
The second attractive feature is the role infrastructure plays in the global decarbonisation trend.
"Infrastructure and utilities are at the forefront of this effort and can offer investors a stable return on equity without taking technology risk," said Hamieh.
"Annual power sector capital spending is expected to increase from US$760 billion in 2019 to US$2.5 trillion (in 2019 dollars) by 2030, with approximately half spent on solar, wind and other renewable energy generation and a third on modernising and extending electricity networks."
As well as electrical infrastructure, there is infrastructure involved with electric vehicles, public transport, hydrogen and carbon capture.
"So there are several areas of infrastructure benefiting from decarbonisation tailwinds, not to mention other secular trends like 5G driving investment in communication towers."
Three ASX shares going gangbusters
In its quarterly report, ClearBridge named three infrastructure ASX shares it holds that have performed well in recent months.
Atlas Arteria Group (ASX: ALX) is a toll road operator that has 75% of its business in France.
"Atlas Arteria has an experienced management team with a long track record in toll road and infrastructure investment, making them well placed to further optimise the Atlas Arteria portfolio," read the report.
ClearBridge analysts have especially high hopes for the APRR concession in eastern France.
"We expect APRR to continue to negotiate network enhancements resulting in concession extensions or toll increases."
Atlas shares performed well after pension fund IFM Investors snapped up 15% of the stocks last month.
There is a possibility that IFM will want to take over the entire company, the ClearBridge report read.
Gas and energy operator APA Group (ASX: APA) also contributed significantly to ClearBridge last quarter.
"Most of APA's assets consist of gas transmission pipelines that are regulated or have long-term contracts," read the report.
"Average contract tenor at APA is in excess of 12 years."
According to the analysts, APA generates "attractive" return on investments from its contracted gas assets, above the cost of capital.
"Following a period of heavy investment (organic and acquisition-based), APA is generating high levels of operating cash flow and returning strong dividend growth to investors."
ClearBridge also holds Transurban Group (ASX: TCL), which dominates toll road ownership in Sydney and Melbourne.
"Transurban is an attractive company due to its increasing free cash flow profile driven by traffic growth, toll increases linked to CPI and strong cost control resulting in their ability to increase dividends," read the report.
"Transurban has a high-quality management team and actively manages assets through its owner/operator model to extract cost savings and synergies, which maximises margins and returns on capital."
The company has contracts that allow for price increases at or above inflation.
"As the dominant toll road owner in the regions it operates, Transurban has significant optionality in the network for future enhancement projects and a proven track record of working with government partners."
ClearBridge analysts also like Transurban's "attractive yield with growth potential".
