A monthly review and outlook of the Global Listed Infrastructure sector.
Market review - as at December 2023
Global Listed Infrastructure ended the calendar year on a positive note, aided by a growing consensus that interest rate cuts were likely in 2024. The FTSE Global Core Infrastructure 50/50 index returned +4.4% in December, while the MSCI World index^ ended the month +4.9% higher.
The best performing infrastructure sectors were Other (+14%) and Airports (+8%). The ports, satellites and merchant power operators that make up the Other sector were led higher by EM port stocks. Airports were buoyed by positive regulatory developments for Mexican operators. The worst performing infrastructure sector was Energy Midstream (-1%), which dipped following strong gains earlier in the year. Declining oil and natural gas prices also weighed on sentiment towards the sector.
The best performing infrastructure region was Latin America (+10%), owing primarily to strong gains for Mexico’s airports. The worst performing infrastructure region was the UK (+1%), reflecting muted gains for its electric and water utility stocks.
^ MSCI World Net Total Return Index (USD) is provided for information purposes only. Index returns are net of tax. Data to 31 December 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. These companies 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 (ie largely fixed costs as sales increase) has proved supportive of earnings growth. From here, we believe that 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. Following a challenging 2023, these stocks face a more constructive outlook for 2024. Balance sheets are in better shape, customer bill pressures are declining and we could see a re-emergence of M&A activity. Capital expenditure growth should accelerate, reflecting the need for increased resiliency spend and higher electricity usage growth from data centres, industrial on-shoring and electric vehicles. However, this growth is also likely to require increased equity issuance.
The portfolio remains underweight energy midstream. Supportive oil and natural gas prices, robust LNG export levels and a disciplined approach to capital expenditure saw the sector generate strong free cash flow in 2023. This may allow energy midstream companies to increase dividend payments and carry out share buybacks, along with some M&A activity, in 2024. However, following strong share price gains in recent years, we believe that greater mispricing can be found elsewhere within our opportunity set.
The portfolio is also underweight airports. The sector saw a significant increase in passenger volumes during 2023, led by leisure-orientated airports catering to pent-up travel demand. In 2024, we anticipate a recovery in retail spending by Chinese travellers and a gradual improvement in business traffic. Offsetting this to some extent, we are conscious that cost-of-living pressures may now begin to constrain demand for leisure travel.
Source : Company data, First Sentier Investors, as of 31 December 2023.
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