The global pandemic has created heightened levels of concern around asset valuations, especially for infrastructure and property assets. However, while current conditions are not the normal for modern times, are they more uncertain than “normal”?
Some assets are more sensitive to economic growth levels than others. For example, the value of seaports depends on shipping volumes, which is highly sensitive to GDP growth. In contrast, electricity grids and oil pipelines are typically “take or pay” arrangements where one party has the obligation of either taking delivery or paying a specified amount, so there is some certainty there. The value of toll roads depends on the long-term traffic growth expectations, but critical commercial routes will have less associated risk. On office property, there is likely to be a shift in the approach to office work, with less density and fewer people at work. But the valuers of office buildings have already downgraded asset values to allow for the uncertainty around this.
We know that people will not stay in lockdown no matter what, not indefinitely. It’s human nature to want to move around, to socialise and to travel. Mobility data in the US and in Europe has rebounded despite the number of coronavirus cases and deaths. The future is uncertain and always has been. Throughout time we have heard commentators describe prevailing conditions for investing as “particularly uncertain”. This year has turned out very differently than we expected last year. So, while we have a lot of data already about the impact of the pandemic on economies and people’s behaviour, many aspects of asset valuations are less of an unknown. To paraphrase Donald Rumsfeld, the impact of unknown unknowns is more difficult than known unknowns, but the investment markets have to deal with this every year as they look forward.