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

Market Review - as at February 2020

Global Listed Infrastructure fell in February on concerns that the spread of COVID-19 could weigh more heavily on economic activity levels than initially anticipated. The FTSE Global Core Infrastructure 50/50 index returned -8.9% over the course of the month, while the MSCI World Index^ fell -8.5%. 

The best performing infrastructure sector was Towers (-1%), which were supported by the prospect of robust capex spending on tower services by US mobile carriers into the medium term, as the proposed T-Mobile / Sprint merger drew a step closer.

The worst performing infrastructure sector was Airports (-12%), which saw sharp near term falls in passenger volumes. Sydney Airport (-7%, not held) noted that passenger traffic was trending down in-line with the SARS experience of 2003, with falls of between -15 and -20% for International passengers; and declines of between -5 and -10% for Domestic passengers.

Utilities (-7% to -9%) fell during the month, despite their defensive earnings and a backdrop of falling bond yields. This provides a reminder that utility stocks, as listed assets, can be affected by short periods of elevated market volatility. It also illustrates the indiscriminate nature of the recent sell-off. We anticipate that their essential service nature and domestic focus will enable utilities to hold up better than most sectors in the event of an economic slowdown over coming months.

The best performing infrastructure region was the UK (-4%), where utilities were supported by relatively modest valuation multiples. Over the longer term, the UK’s “net zero by 2050” carbon emission target is expected to present the country’s utilities with significant investment opportunities in the build-out of renewables and transmission & distribution network upgrades. The worst performing infrastructure regions were Europe ex UK (-11%) and Japan (-10%) as confirmed virus cases increased outside China, with Italy and Japan seemingly amongst the countries hardest hit. Transport infrastructure stocks in both regions underperformed.



All stock and sector performance data expressed in local currency terms. Source: Bloomberg.

^MSCI World Net Total Return Index, USD. 

Market Outlook and Strategy 

We invests in a range of global listed infrastructure assets including toll roads, airports, railroads, utilities, pipelines, and wireless towers. 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.

COVID-19 developments overshadowed financial markets for a second consecutive month in February. Our expectation remains that infrastructure’s essential service provision and contracted or regulated business models will insulate the asset class from the worst of its effects.

Transport is likely to be the most impacted infrastructure sub-sector, with airports and passenger rail the most vulnerable. 

For quality airports, regulated aeronautical revenues, retail minimum guarantees and property leases should help mitigate the impact.

Pipelines are typically contracted or regulated assets, so cash flows are unlikely to be impacted in the near term. That said, pipeline stocks may underperform reflecting the impact of reduced commodity prices on growth outlook and rising counter-party risks. 

Utilities should be least impacted by COVID-19, particularly those with regulated networks where revenues are de-coupled from volumes. There is a minor risk for some growth utilities that supply chains are disrupted – for example solar panels. Wireless towers may also see some supply chain disruption for 5G equipment. In the medium term the Coronavirus probably highlights the need for improved wireless / remote / VC capabilities which should be supportive of tower growth.

As long-term investors we have only made minor changes to the portfolio in recent weeks, for example reducing our underweight in airports.

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 document has been obtained from sources that First State Investments (“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. 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 document may not be edited and/or reproduced in whole or in part without the prior consent of FSI. 

This document is issued by First State Investments (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission in Hong Kong. First State Investments is a business name of First State Investments (Hong Kong) Limited. The First State Investments logo is a trademark of the Commonwealth Bank of Australia or an affiliate thereof and is used by First State Investments under licence.

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 State Investments’ portfolios at a certain point in time, and the holdings may change over time. 

First State Investments (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, operating in Australia as First Sentier Investors and as FSI elsewhere.

MUFG and its subsidiaries are not responsible for any statement or information contained in this document. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk, including loss of income and capital invested.