A monthly review and outlook of the Global Listed Infrastructure sector.
Market review - as at May 2023
Global Listed Infrastructure Global Listed Infrastructure declined in May on investor concerns that inflation, and therefore interest rates, may remain elevated for longer than previously hoped. The FTSE Global Core Infrastructure 50/50 index returned -5.1% while the MSCI World index^ ended the month -1.0% lower.
The best performing infrastructure sectors were Railroads (flat) and Other (+1%). Railroads held up thanks to steady returns from Japanese passenger rail, while North American freight rail stocks were supported by attractive valuations and the view that recent volume declines may soon reach a floor. The ports, satellites and merchant power operators that make up the Other sector were buoyed by gains for Emerging Market port stocks.
The worst performing infrastructure sector was Towers / Data Centres (-9%), as concerns for interest rate levels and future leasing demand continued to weigh on tower stocks. During the month both the US Federal Reserve and European Central Bank raised interest rates by 0.25%.
The best performing infrastructure region was Japan (+5%), whose electric Utilities were buoyed by government approval to raise power prices. The worst performing infrastructure region was the United States (-6%), reflecting underperformance from its Tower / DCs, Energy Midstream and Utility / Renewables stocks.
^ MSCI World Net Total Return Index (USD) is provided for information purposes only. Index returns are net of tax. Data to 31 May 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.
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 interest costs, and elevated regulatory and political risk. 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 their typically regulated / contracted earnings streams.
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.
In the communications infrastructure space, structural growth in demand for data continues to support earnings growth in the towers space. Concerns for higher interest rates are now better reflected in valuation multiples. Data centres are positioned to benefit from growing demand for cloud computing, driven in part by the recent surge in AI interest.
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. Traffic data from the Airports sector has highlighted a keen appetite to travel, with the strongest recovery seen at tourism-focused airports.
Source : Company data, First Sentier Investors, as of 31 May 2023.
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 material has been obtained from sources that First Sentier Investors (“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. To the extent permitted by law, 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 material may not be edited and/or reproduced in whole or in part without the prior consent of FSI.
This material is issued by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission in Hong Kong. First Sentier Investors is a business name of First Sentier Investors (Hong Kong) Limited.
First Sentier Investors (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.
To the extent permitted by law, MUFG and its subsidiaries are not responsible for any statement or information contained in this material. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment or entity referred to in this material 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.
Get the right experience for you
Your location :
Hong Kong
Australia & NZ
-
Australia
-
New Zealand
Asia
-
Hong Kong (English)
-
Hong Kong (Chinese)
-
Singapore
-
Japan