A monthly review and outlook of the Global Listed Infrastructure sector.
Market review - as at July 2021
Global Listed Infrastructure gained in July, as quarterly earnings results highlighted the resilience and essential service nature of the asset class. The FTSE Global Core Infrastructure 50/50 index gained +1.3%, while the MSCI World index^ ended the month +1.8% higher.
The best performing infrastructure sectors were Water / Waste (+9%) and Electric Utilities (+4%), as investors sought defensive assets against a backdrop of rising Delta variant case numbers. The worst performing infrastructure sector was Pipelines (-2%), which consolidated strong year-to-date gains. Toll roads (-1%) also lagged, with Emerging Market operators affected by the uncertain pace of traffic recovery.
The best performing infrastructure region was Australia / NZ (+6%), as takeover bids for Sydney Airport (+35%, not held) and Spark Infrastructure (+24%, not held) provided the latest reminder of the intrinsic value available to investors within this asset class. The worst performing infrastructure region was Japan (-4%), as rising coronavirus case numbers and a longer and broader State of Emergency weighed on the country’s passenger rail stocks.
^ MSCI World Net Total Return Index, USD
All stock and sector performance data expressed in local currency terms. Source: Bloomberg.
Market outlook and strategy
The Portfolio 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.
Toll roads represent the portfolio’s largest sector overweight, via positions in European, Asia Pacific and Latin American operators. We believe these companies represent exceptional value at current levels, with traffic volumes proving significantly more resilient than those of other transport infrastructure assets. While new coronavirus variants have clouded the near term outlook, we remain confident that toll roads will lead a return to normal demand levels as economic activity levels pick up.
The portfolio is also overweight water / waste companies. This exposure consists of stable, income-generative UK and US-listed water utilities, deriving regulated earnings from the provision of essential services. The pressing need for investment to replace and repair aging water pipe networks in the US represents an additional source of long-term earnings growth. The portfolio has also built a position in US waste management company Republic Services, which stands to benefit from higher waste volumes as the US economy continues to improve.
The portfolio is underweight electric / multi-utilities. While these companies represent a large segment of the global listed infrastructure universe, and are a good source of yield and defence, some have traded up to levels where limited mispricing is evident. That said, a substantial portion of the portfolio still consists of high conviction utility holdings. The portfolio’s focus is on companies with the scope to derive steady, low risk earnings growth from rate base investment (replacing ageing distribution networks, upgrading substations, expanding transmission lines); and the replacement of older coal-fired power stations with wind farms and solar power.
The portfolio also has an underweight exposure to Pipelines owing to the structural headwinds that these companies could face over the medium and long term, as decarbonization and Net Zero initiatives gather pace. Strong year-to-date gains for these companies have also contributed to our relatively cautious view. Within this space, the portfolio’s exposure is focused on those stocks that have agreed long term contracts with high quality counterparties; with lower sensitivity to commodity price movements.
Source : Company data, First Sentier Investors, as of end of July 2021.
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