A monthly review and outlook of the Global Listed Infrastructure sector.
Market review - as at April 2023
Global Listed Infrastructure increased in April, supported by generally robust March quarterly earnings. The FTSE Global Core Infrastructure 50/50 index returned +2.1% while the MSCI World index^ ended the month +1.8% higher.
The best performing infrastructure sector was Toll Roads (+5%), owing to healthy March quarter earnings numbers and a positive outlook for traffic volumes. The worst performing infrastructure sector was Towers / Data Centres (-1%), as telecom equipment manufacturer Ericsson noted that its mobile network equipment unit had seen a decline in revenues from North American 5G projects. Concerns that lower free cash flow levels at US telecom companies AT&T and Dish Network could affect future leasing demand also weighed on tower stocks.
The best performing infrastructure region was Japan (+7%), reflecting strong gains for its passenger rail stocks on expectations that passenger numbers would normalise / increase from here; and for its electric and gas utilities owing to better than expected March quarter earnings numbers. The worst performing infrastructure region was Latin America (-1%), as political uncertainty weighed on Mexican airport operators.
^ MSCI World Net Total Return Index (USD) is provided for information purposes only. Index returns are net of tax. Data to 30 April 2023. Source: First Sentier Investors / Lipper IM. All stock and sector performance data expressed in local currency terms. Source: Bloomberg.
Market outlook and Strategy
The Portfolio invests in a range of listed infrastructure assets including toll roads, airports, railroads, utilities and renewables, energy midstream, wireless towers and data centres. 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.
Toll roads remain the portfolio’s largest sector overweight. Robust traffic volumes and inflation-linked toll increases are leading to healthy earnings growth. We are alert to potential headwinds, such as an economic slowdown leading to a dip in truck traffic on longer distance roads; or soft commuter traffic levels on some intra-city roads as the return-to-office trend settles. Overall however we expect toll roads to remain strong performers as toll increases support earnings growth, and demand proves resilient.
The portfolio is slightly overweight towers / data centres. Consumers and businesses alike continue to move activities onto digital platforms, underpinning growing demand for communication infrastructure assets. While concerns for leasing demand have arisen this month, and higher interest rates may be more of a headwind to EPS growth than in previous years, the structural growth thesis supporting this sector remains intact.
A substantial part of the portfolio consists of utilities / renewables stocks. Decarbonisation, electrification and resiliency spend represent large and growing investment opportunities for these companies. These investments drive utilities’ rate base growth, leading in turn to earnings growth. However, in the near term this growth is likely to be tempered by rising interest costs. Despite these headwinds, we believe utilities have the potential to deliver reasonable earnings growth, underpinned by plentiful capital investment opportunities and aided by limited sensitivity to a weaker economic backdrop.
An underweight position has been maintained in the energy midstream sector, with exposure consisting of high conviction positions in companies with exposure to low cost basins; or that are positioned to benefit from growth in US LNG exports. We remain conscious of the structural headwinds that Net Zero initiatives may pose to this sector in the longer term.
Source : Company data, First Sentier Investors, as of 30 April 2023.
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