Global Listed Infrastructure Monthly review and outlook

Global Listed Infrastructure held up relatively well in April as robust earnings results enabled the asset class to shrug off renewed concerns for rising interest rates. The FTSE Global Core Infrastructure 50/50 index returned -1.3% while the MSCI World index^{^} ended the month -3.7% lower.

The best performing infrastructure sector was Airports (+2%), as positive March quarter earnings propelled Mexican airport operators sharply higher. Utilities / Renewables (+2%) gained on the back of strong earnings; and on an increasingly favourable outlook for power demand. The worst performing infrastructure sector was Towers / DCs (-11%) as persistently high inflation rekindled interest rate concerns. Tower companies typically have fixed escalators built into their contracts with clients, but less ability to pass through higher interest costs. 

The best performing infrastructure region was Latin America (+4%), owing to strong gains for Mexico’s airports. The worst performing infrastructure region was Australia / NZ (-5%), which was held back by lacklustre returns from the region’s transport infrastructure stocks.

^{^} MSCI World Net Total Return Index (USD) is provided for information purposes only. Index returns are net of tax. Data to 30 April 2024. Source: First Sentier Investors / Lipper IM. All stock and sector performance data expressed in local currency terms. Source: Bloomberg.

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, via positions in seven companies with operations in ten countries. Toll roads have benefited from a shift towards cars and away from public transport since the COVID-19 pandemic. To date, inflation-linked toll increases have had little impact on demand. Strong operating leverage (i.e. largely fixed costs as sales increase) has proved supportive of earnings growth. Improvements made to toll road networks in recent years provide scope for further growth in traffic volumes.

A substantial portion of the portfolio consists of utilities / renewables. Electricity demand has remained roughly flat in many developed markets for many years. However, growth in data centres, industrial on-shoring and electric vehicles is expected to lead to a steady increase in demand in the years ahead. The shift from coal generation to wind, solar and storage, supported in the US by the Inflation Reduction Act, and the need for increased resiliency spend, should also support meaningful capital expenditure growth. Increased capex should in turn drive higher rate base and earnings growth for regulated utilities.

The portfolio remains underweight energy midstream. A supportive oil price, robust LNG export levels and a disciplined approach to capital expenditure are enabling the sector to generate strong free cash flow. However, following a sustained period of strong performance, mispricing in this sector has become less evident. We have maintained high conviction positions in companies operating in low cost basins; or that are positioned to benefit from growth in US LNG exports.