Global Listed Infrastructure Monthly review and outlook

Global Listed Infrastructure held up relatively well in August as renewed concerns about inflation and rising interest rates weighed on financial markets. The FTSE Global Core Infrastructure 50/50 Index declined -1.5% while the MSCI World Index^{^} ended the month -4.2% lower.

The Airports (+3%) sector gained as June quarter earnings numbers highlighted positive operating leverage to improving passenger volumes. The worst performing infrastructure sector was Towers/Data Centres (-6%). These relatively interest rate-sensitive stocks lagged after a speech by the head of the US Federal Reserve emphasised a determination to keep raising interest rates until inflation subsides.

The best performing infrastructure region was Latin America (+8%), reflecting strong returns from Mexico’s airports and Brazil’s railroads and toll roads. The worst performing infrastructure region was the United Kingdom (-5%). Its utilities fell after higher natural gas prices caused a sharp rise in the regulator-set limit on UK consumer energy bills from October onwards. This led to concerns about the potential need for changes to the regulatory model, or political intervention.

^{^} MSCI World Net Total Return Index (USD) is provided for information purposes only. Index returns are net of tax. Data to 31 August 2022. 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.

Against an unpredictable economic backdrop, listed infrastructure remains supported by a number of structural growth drivers. We remain optimistic about the substantial investment opportunities associated with the decarbonisation of the world’s energy needs. Utilities, which represent about a half of the listed infrastructure opportunity set, are positioned to derive steady, regulated earnings growth by building solar and wind farms, and by upgrading and expanding the networks needed to connect these new power sources to the end user. In the medium term, the roll-out of electric vehicles is then expected to provide an additional boost to utilities — first from investment opportunities associated with linking EV charging stations to the grid; and then from higher overall demand for electricity. Our strategy has a long-held preference for US over UK/European utility companies, owing to relatively transparent and fair US regulatory frameworks and historically lower levels of US political and regulatory interference.

Digitalisation is another key theme for the asset class. Structural growth in demand for mobile data (underpinned by an ever-growing reliance on digital connectivity) continues to support steady earnings growth for Towers and Data Centres, insulating them from the ebbs and flows of the broader global economy. The changes required during the pandemic have already led to a greater reliance on wireless data in many people’s everyday lives. The adoption of 5G technology over the medium term will require networks to handle increased data speed, and a much higher number of connected devices.

Source: Company data, First Sentier Investors, as of 31 August 2022.