INFRASTRUCTURE AS A FINANCIAL ASSET CLASS: AN EMPIRICAL EVALUATION

Abstract

The earliest literature on infrastructure talks about the significance of infrastructure for the productivity, well-being, international trade, and economic growth of a country. Much attention has been given to contribution of a sound infrastructure in the development of a nation by emphasizing positive relationships between infrastructure development and various growth indicators such as Gross Domestic Product (GDP) and productivity. However, from investment viewpoint, most of the earlier studies highlight the unique investment attributes of infrastructure assets only theoretically. Some of these characteristics include longer investment horizons, quasi-monopolistic nature of assets, long-term stable cash flows, inflation hedging and diversification potential, asset liability matching etc. There is a paucity of research that empirically examines these characteristics of infrastructure investments, especially in the context of emerging markets. This research work focuses on empirically testing the listed infrastructure investments in the light of an investment class. Infrastructure, though an important investment opportunity in the alternative investment space, is largely under-researched as compared to other alternative investments such as real estate and private equity. The main aim of this thesis is to enhance the understanding of the importance, performance, and investment features of listed infrastructure from multi-dimensional investment viewpoints at domestic, cross-country, and global levels. At the initial level, the research seeks to assess the risk-return and diversification potential of listed infrastructure indices at the domestic level, i.e., India over the period 2014 - 2019. To make a representative sample of Indian infrastructure market, ten listed indices including six thematic (infrastructure related) and four traditional indices (for comparison purposes) were included in the analysis. For measuring performance, different risk-return metrics were used. Descriptive statistics highlighted that there is a wide variation in the risk and return profiles of various sub-sectors within the infrastructure universe. Additionally, Sharpe and Treynor ratios were used to assess the risk-adjusted performance of infrastructure and other asset classes across all the three domestic, cross-country, and global levels. Based on that, energy stood out as the superior performing asset class, outperforming all the other asset classes in the Indian context followed by common stocks and real estate. Composite infrastructure index series (S&P BSE Infrastructure) was found to be the worst performer with a negative Sharpe ratio of -0.38. The performance analysis of listed infrastructure at domestic level is useful in providing valuable insights into the characteristics of infrastructure. At the cross-country level, another major investment attribute of infrastructure was tested. By comparing four of the fastest growing emerging markets, inflation hedging potential of listed infrastructure investments was tested in these markets in both the short and the long term. Monthly total returns data was used for a ten-year time frame, from M1:2010 to M12:2019. A unique dataset comprising composite infrastructure and three of its sub-sectors was analyzed and then compared with two traditional asset classes, namely stocks and real estate. In addition to this, Consumer Price Index (CPI) was used as a proxy for country-level inflation through the same time period. The empirical results found were much expected. The findings suggest that most of the variables depict a negative relationship with inflation components, highlighting the inability of infrastructure and its sub-sectors to provide inflation protection in the short run. As opposed to this, the results of the long-term co-integration analysis show that all the asset classes (except energy) are co-integrated with actual inflation providing a long-term hedge against inflation, particularly in India, China, and Indonesia. The results of both short- and long-term dynamics between asset returns and inflation clearly conclude that sub-sectors within the larger infrastructure universe have distinct investment characteristics from each other and cannot be considered wholly. Similarly, real estate and infrastructure depict two distinct asset classes and deserve individual investor attention. To conduct in-depth research regarding the hedging properties of infrastructure, risk hedging properties of listed infrastructure are further examined at the global level. Using dynamic conditional correlation along with quantile regression, global listed infrastructure indices were tested for their hedge, diversifier, and safe have properties over a ten-year timeframe. The empirical findings suggested that listed infrastructure is not immune to changes in the broader stock market at the global level. While all the sectors under study act as effective diversifiers against the other six asset classes, transportation proved to be a strong safe haven against bonds, electric utilities against hedge funds, and toll roads also against hedge funds. Empirical findings of this research attempt to fill a much-recognized literature gap on the investment attributes of infrastructure. Apart from this, theoretical contributions are also made through this research. This research has explored the current state of infrastructure investment gap and the role private sector can play to bridge this gap. In doing so, this research expands the existing body of knowledge by providing researchers and practitioners with a comprehensive overview of infrastructure as an investment class. The findings of this research also attempt to clear the uncertainty surrounding infrastructure investments being a relatively new asset class and help investors in making informed investment decisions. Additionally, the findings of this research highlight the effectiveness and vast heterogeneity of the infrastructure universe. Keeping in view the investment properties of listed infrastructure, it can play a key role in the investors’ multi-asset portfolios. It is expected that this thesis would help institutional investors such as pension funds, insurance companies, and sovereign wealth funds, and investors with high exposure to infrastructure in their portfolios in making better strategic investment decisions. Furthermore, this research would help leaders and policymakers around the globe who are trying to increase private investment in this asset class. Another important contribution of this research is the focus on the global significance of increased investment in infrastructure. The shortfall in healthcare infrastructure during the COVID-19 pandemic has highlighted the insufficient funding in this sector. There is a need to promote market-related investment vehicles to boost private investment in this sector.