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Global Listed Infrastructure Monthly review and outlook

Global Listed Infrastructure Monthly review and outlook

A monthly review and outlook of the Global Listed Infrastructure sector.

Market review - as at December 2022

Global Listed Infrastructure gave up ground in December as renewed concerns for recession in 2023 weighed on financial markets. The FTSE Global Core Infrastructure 50/50 index declined –2.2% while the MSCI World index^ ended the month –4.2% lower. 

The best performing infrastructure sectors in this risk-off environment were Utilities / Renewables (flat) and Water / Waste (flat). Much of the US was affected by severe winter storms. However, utilities’ regulated business models typically treat weather-related costs as a pass-through, meaning that they should be able to recover costs from customers over time. The worst performing infrastructure sector was Energy Midstream (-10%) as investors took profits from the best performing infrastructure sub-sector ytd (and of 2021).

The best performing infrastructure regions were Japan (+1%), where electric utilities were buoyed by government approval of a plan promoting the use of nuclear power; and Asia ex-Japan (+1%), which rose as China lifted its stringent zero-Covid policies. The worst performing infrastructure region was Europe (-6%), as high energy prices and a lacklustre economic outlook weighed on the region’s infrastructure stocks. 

 

^  MSCI World Net Total Return Index (USD) is provided for information purposes only. Index returns are net of tax. Data to 31 December 2022. Source: First Sentier Investors / Lipper IM. All stock and sector performance data expressed in local currency terms. Source: Bloomberg.

Market outlook and Strategy

The Strategy 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.

The asset class remains positioned to benefit from several long term, 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 global 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. Technology advances and lower costs for utility-scale battery storage will enable renewables to represent a greater share of the overall electricity generation mix over time. The Inflation Reduction Act, signed into law in August 2022, is expected to provide greater certainty of earnings growth for US utilities, particularly those involved in the transition away from fossil fuels and towards renewables. 

Digitalisation is another key long term theme for the asset class. The changes required during the pandemic accelerated a shift towards the use of wireless data in many people’s everyday lives. While rising interest rates weighed on Towers and Data Centres earlier in 2022, structural growth in demand for mobile data (underpinned by the growing reliance on digital connectivity) continues to support steady revenue growth for these stocks. 2023 is likely to see the continued rollout of 5G mobile technology. This will require networks to handle increased data speed, and a much higher number of connected devices, to the benefit of towers.

We also see continued evidence of recovery within the transport infrastructure space. Toll roads represent exceptional value at current levels, with traffic volumes (particularly car traffic) proving resilient. These assets are likely to fare relatively well in a higher inflation environment. Many toll roads have concession agreements that specify how prices can be increased, with an option to follow the inflation rate or an agreed percentage — whichever is higher. As a result, year-on-year toll uplifts of between 4% and 7% are likely for many developed market roads. Traffic data from the Airports sector has highlighted a keen appetite to travel, with the strongest traffic recovery seen at tourism-focused airports. We continue to favour leisure airports with a strong network of low cost airlines, such as Spain’s AENA or Mexico’s ASUR.

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

Important information

Investment involves risks, past performance is not a guide to future performance. Refer to the offering documents of the respective funds for details, including risk factors. The information contained within this material has been obtained from sources that First Sentier Investors (“FSI”) believes to be reliable and accurate at the time of issue but no representation or warranty, expressed or implied, is made as to the fairness, accuracy or completeness of the information. To the extent permitted by law, neither FSI, nor any of its associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from any use of this. It does not constitute investment advice and should not be used as the basis of any investment decision, nor should it be treated as a recommendation for any investment. The information in this material may not be edited and/or reproduced in whole or in part without the prior consent of FSI.

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Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of First Sentier Investors’ portfolios at a certain point in time, and the holdings may change over time.

First Sentier Investors (Hong Kong) Limited is part of the investment management business of First Sentier Investors, which is ultimately owned by Mitsubishi UFJ Financial Group, Inc. (“MUFG”), a global financial group. First Sentier Investors includes a number of entities in different jurisdictions.

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