After the bear market of 2022, next year should definitely get better. Unfortunately, it may get worse before we get there.
Index returns have been bad enough, but some individual stocks have fared far worse. Slowing inflation and a moderating Fed both offer reasons for optimism, but the possibility of a recession in 2023 still demands caution.
Markets move in cycles but generally trend higher over time. That’s why bear markets end and give way to bull markets. Plus, bull markets usually last longer than the bear markets that come before.
The current bear market is an opportunity for long-term investors to invest ahead of the next bull market. And the bear market is likely to end in 2023.
Inflation has been moving lower and has likely peaked. In response, the Fed has already raised the Fed Funds rate to the highest level in 15 years. The twin catalysts of ever-rising inflation and a hyper-aggressive Fed that caused this bear market are likely to abate in 2023.
Markets tend to anticipate six to nine months into the future. The average bear market since 1980 has only lasted a little over a year. This bear market is almost a year old already. Since 1979, there have been seven calendar years of negative market returns. Five of those years were followed by years of market returns of at least 20%.
It will likely pay to get aggressive at some time in 2023. But not yet.
Inflation has gone down a little. But it’s still way too high and no one really knows how easily it will fall or how sticky it will be. It could continue to recede without much more pain, or it could take a deep recession to tame it. Plus, there is great uncertainty about how much damage the rate hikes have done already.
It takes a while for the effects of interest rate hikes to filter through the economy. This has been the steepest, or fastest, rate hiking cycle in the last 30 years. It will be several months from now before we know how the economy reacts. Most economists are predicting a recession sometime in 2023. The markets are currently pricing in a very mild downturn. But it could be far worse.
The problem with a souring economy is earnings. In the end, stocks are all about earnings. A recession will take a further toll on stock prices as profits tumble. It will likely be more tough sledding on the way to the Promised Land. In the meantime, it should pay to have a stock that can endure the hardship.
Brookfield Infrastructure Corporation is an ideal recession stock for times like these. And it’s still cheap.
Brookfield Infrastructure Corporation (BIPC)
Yield: 3.5%
BIPC is stock representing shares in the same entity as the original Brookfield Infrastructure Partners (BIP), except that instead of a Master Limited Partnership BIPC is in the form of a regular corporation.
Unlike an MLP, BIPC doesn’t generate a K1 form at tax time or have special tax implications in a retirement account. Dividends generate a regular 1099 and are taxed at the maximum 15% (or in some cases 20%) rate. Shares are also more actively traded because funds and institutions that are prohibited from buying MLPs can now buy them.
Since the BIPC shares were established in early 2020, they have outperformed BIP shares to the tune of about 30%. That’s because demand for shares is higher because more investors can buy them and others find owning a regular corporation more desirable.
Bermuda-based Brookfield Infrastructure Corporation owns and operates infrastructure assets all over the world. The company focuses on high-quality, long-life properties that generate stable cash flows, have low maintenance expenses and are virtual monopolies with high barriers to entry.
Infrastructure is defined as the basic physical structures and facilities needed for the operation of a society or enterprise. It includes things like roads, power supplies and water facilities. Not only are these some of the most defensive and reliable income-generating assets on the planet, but infrastructure is rapidly becoming a more timely and popular subsector.
The world is in desperate need of updated infrastructure. The private sector is filling the need as governments don’t have all those trillions lying around. Limited partnerships, giant sovereign-wealth funds, multilateral and development-finance institutions are raising billions of dollars a year for infrastructure investments. It’s almost becoming a new asset class.
As one of the very few tested and tried hands, Brookfield is right there. It’s been successfully acquiring and managing these properties for more than a decade in a way that delivers for shareholders. Since its IPO in 2008, the original BIP has provided a total return of 788% (with dividends reinvested) compared to a return of 288% for the S&P 500 over the same period. And those returns came with considerably less risk and volatility than the overall market.
Brookfield operates a current portfolio of over 1000 properties in more than 30 countries on five continents. The company operates four segments: Utilities (30%), Transport (30%), Midstream (30%) and Data (10%).
Assets include:
· Toll roads in South America
· Telecom towers in India and France
· Railroads in Australia and North America
· Utilities in Brazil
· Natural gas pipelines in North America
· Ports in Europe, Australia and North America
· Data centers on five continents
The dividend is rock solid with a low 70% payout ratio and a history of steady growth, The payout has grown by a CAGR (compound annual growth rate) of 10% per year since 2009 and the company is targeting 5% to 9% annual growth going forward.
BIP is a good long-term investment anytime, as the above numbers illustrate, but it is particularly attractive now because it’s cheap and can well navigate both inflation and recession. The recent interest rate spike caused a major selloff in defensive dividend-paying stocks and pulled BIP all the way down near the low.
Also, 85% of revenues are hedged to inflation with automatic adjustments built into its long-term contracts and its crucial service assets should be extremely resilient in a recession. Plus, Brookfield’s crucial assets are very recession-resistant and earnings should remain strong even if there is a deeper recession than currently expected.
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