Global Listed Infrastructure Monthly review and outlook

Market review - as at April 2021

Global Listed Infrastructure rose in April, supported by generally resilient quarterly earnings numbers and rapid progress in the US vaccination rollout. The FTSE Global Core Infrastructure 50/50 index returned +3.4%. The MSCI World index^{^} ended the month up +4.7%.

The best performing infrastructure sector was Towers / Data Centres (+7%), which gained on easing bond yields, positive earnings results and the anticipation of higher growth rates as telecom operators ready themselves to deploy 5G equipment onto tower sites at scale.

The worst performing infrastructure sector was Airports (-1%), owing to ongoing uncertainty about the timeframe for a return to normal travel and economic activity levels. Recent progress on this front includes the opening of a “travel bubble” between Australia and New Zealand; and hopes that the EU may introduce a digital Vaccine Passport in time for the European summer holidays.

Railroads (flat) also underperformed, with passenger rail stocks affected by similar concerns. Sentiment was more bullish in the freight rail space; Canadian National (-9%, not owned) made a US$34 billion counter-bid for Kansas City Southern (+11%, not owned), a 21% premium to the current bid from rival Canadian Pacific (-4%, not owned).

The best performing infrastructure region was the UK (+5%), owing to robust performance from its utility stocks against a backdrop of easing lockdown restrictions. The worst performing infrastructure region was Japan (-7%). The country’s electric utilities fell on concerns for lower electricity sales as new entrants gain market share.

^{^} MSCI World Net Total Return Index, USD

All stock and sector performance data expressed in local currency terms. Source: Bloomberg.

Market outlook and strategy

The Portfolio invests in a range of global listed infrastructure assets including toll roads, airports, railroads, utilities, pipelines, and wireless towers. These sectors share common characteristics, like barriers to entry and pricing power, which can provide investors with inflation-protected income and strong capital growth over the medium-term.

The outlook for the asset class is positive. Government attempts to bolster economic fundamentals through infrastructure and green energy stimulus plans — including Biden’s infrastructure plan — are likely to benefit many global listed infrastructure firms. In particular, the ongoing repair and replacement of old energy transmission and distribution grids, along with the accelerating build-out of renewables, should represent a steady source of utility earnings growth over many years. The resilience, predictability and growth potential of these earnings — showcased over the past year — do not appear to be fully reflected in current valuation multiples.

There is also scope for a material recovery in traffic / passenger volumes across coronavirus-impacted infrastructure sectors such as toll roads, airports and passenger rail, as vaccine programs ramp up globally. Reflecting this, toll roads represent the portfolio’s largest sector overweight. We believe these companies represent exceptional value at current levels. Traffic volumes have proved more resilient than those of other transport infrastructure assets; and toll roads are likely to be the first to see a return to normal demand levels.

Rising interest rate risk now appears to have been priced into Towers’ valuations. Ever-increasing demand for mobile data / connectivity needs continues to underpin steady earnings growth for these companies, insulating them from the ebbs and flows of the broader global economy.

More broadly, we also note that financial market pessimism towards global listed infrastructure and optimism towards higher risk assets over the past 12 months has driven an increase in intrinsic value across the asset class. This bodes well for future global listed infrastructure performance.

Source : Company data, First Sentier Investors, as of end of April 2021.

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