Global Listed Infrastructure Monthly review and outlook

Global Listed Infrastructure increased in January, aided by further indications that inflation may have peaked, and by better-than-expected US GDP growth in the December quarter. The FTSE Global Core Infrastructure 50/50 index rose +2.6% while the MSCI World index^{^} ended the month +7.1% higher.  

The best performing infrastructure sector was Airports (11%), which rose on a robust outlook for passenger volumes. Towers / Data Centres (+8%) climbed on hopes that the pace of US and European interest rate rises may begin to ease.

Fraud allegations at Indian conglomerate Adani Group saw the share price of its listed subsidiaries fall sharply, including Adani Ports (-25%, not in our focus list). This contributed to underperformance from the Other (-3%) sector which includes lower quality assets like ports, satellites and merchant power. Railroads (-1%) lagged as higher costs and persistent labour shortages weighed on North American freight rail; while Japanese passenger rail stocks were affected by a slower than expected recovery in passenger numbers.

The best performing infrastructure region was Europe ex-UK (+13%), aided by strong gains for its airports and toll roads. The worst performing infrastructure region was Asia ex-Japan (-1%), owing primarily to sharp falls by Adani-related stocks.

^{^}   MSCI World Net Total Return Index (USD) is provided for information purposes only. Index returns are net of tax. Data to 31 January 2023. Source: First Sentier Investors / Lipper IM. All stock and sector performance data expressed in local currency terms. Source: Bloomberg.

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 outlook for the asset class is positive. Balance sheets and dividend payout levels are generally healthy, and appear well placed to weather a deteriorating economic backdrop. We are conscious of potential headwinds in the form of higher debt costs, and increased regulatory and political risks. Overall however, earnings from this space are expected to be more resilient than those of global equities, owing to the essential service nature of these businesses, and the regulated / contracted frameworks that they typically operate within. 

Public policy support for infrastructure investment remains strong globally, particularly for the replacement of aged infrastructure assets and the buildout of renewables. Utilities are in the midst of a multi-decade structural growth story. 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.

Transport infrastructure is benefitting from a recovery in volumes as travellers return to the air; and as the return-to-office trend ramps up. For many toll roads, the high inflation of 2022 will translate into toll uplifts over coming quarters, supporting healthy earnings growth. 

Source : Company data, First Sentier Investors, as of 31 January 2023.