Global Listed Infrastructure Monthly review and outlook

Global Listed Infrastructure gave up ground in February, as renewed concerns for high inflation weighed again on financial markets. The FTSE Global Core Infrastructure 50/50 index fell -4.8% while the MSCI World index^{^} ended the month -2.4% lower.

The best performing infrastructure sectors were Airports (+2%) and Toll Roads (+1%), reflecting positive trends in passenger / traffic volumes and healthy December quarter earnings numbers. The worst performing infrastructure sector was Towers / DCs (-10%) as rising rate concerns weighed on these bond yield-sensitive stocks. Strong US employment data suggested that further interest rate hikes would be needed to contain persistently high inflation.

The best performing infrastructure region was Australia / NZ (+2%), led higher by transport infrastructure. The worst performing infrastructure region was the US (-6%), where Towers and Utilities lagged. 

^{^} MSCI World Net Total Return Index (USD) is provided for information purposes only. Index returns are net of tax. Data to 28 February 2023. 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, on the view that robust traffic volumes and inflation-linked toll increases will lead to healthy earnings growth. We are alert to potential headwinds, such as an economic slowdown leading to a dip in truck traffic on longer distance roads; or lacklustre commuter traffic levels on some intra-city roads as the return-to-office trend settles. Overall however we expect toll roads to be strong performers as toll increases support earnings growth, and demand proves more resilient than expected by the market.

The portfolio is slightly overweight towers / data centres. Consumers and businesses alike continue to move activities onto digital platforms, underpinning growing demand for communication infrastructure assets. The ongoing rollout of 5G mobile technology is expected to provide an additional tailwind to tower leasing demand. While the revenue outlook remains robust, we are conscious that rising interest rates may be more of a headwind to EPS growth than in previous years.

A substantial part of the portfolio consists of utilities / renewables stocks. Decarbonisation, electrification and resiliency spend represent large and growing investment opportunities for these companies. These investments drive utilities’ rate base growth, leading in turn to earnings growth. However, in the near term this growth is likely to be tempered by rising interest costs. Despite these headwinds, we believe utilities have the potential to deliver reasonable earnings growth, underpinned by plentiful capital investment opportunities and aided by limited sensitivity to a weaker economic backdrop.

An underweight position has been maintained in the energy midstream sector, with exposure consisting of high conviction positions in companies with exposure to low cost basins; or that are positioned to benefit from growth in US LNG exports. We remain conscious of the structural headwinds that Net Zero initiatives may pose to this sector in the longer term.

Source : Company data, First Sentier Investors, as of 28 February 2023.