A monthly review and outlook of the Global Listed Infrastructure sector.
Market review - as at October 2023
Global Listed Infrastructure dipped in October as a renewed focus on geopolitical risk outweighed generally strong quarterly earnings results from the asset class. The FTSE Global Core Infrastructure 50/50 index returned -1.7% while the MSCI World index^ ended the month -2.9% lower.
The best performing infrastructure sector was Towers / Data Centres (+3%), suggesting that the higher interest rate environment may have now largely been priced in to these stocks. Water / Waste (+2%) and Utilities / Renewables (+1%) also recovered ground. The worst performing infrastructure sector was Airports (-8%). Mexican operators were adversely affected by unexpected changes to the terms of the regulatory framework that governs their allowed earnings.
The best performing infrastructure region was the United Kingdom (+4%). The country’s water utilities gained on a positive market reaction to business plans submitted to the regulator for the 2025-2030 period. The worst performing infrastructure region was Latin America (-10%), owing to underperformance from the region’s airports and toll roads.
^ MSCI World Net Total Return Index (USD) is provided for information purposes only. Index returns are net of tax. Data to 31 October 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.
Toll roads represent the Portfolio’s largest overweight position. During the year, robust traffic volumes and inflation-linked toll increases have translated 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 soft commuter traffic levels on some intra-city roads as the return-to-office trend settles. Overall however we expect toll roads to remain strong performers as higher tolls support earnings growth, and demand proves resilient.
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. However North American utilities in particular have lagged in recent months as interest rates have risen. We believe the extent of this underperformance appears to be extreme, given utilities’ generally sound fundamentals, undemanding valuation multiples and substantial longer term growth drivers.
The portfolio is underweight the energy midstream space. Following a sustained period of strong performance, mispricing in this sector has become less evident. We have maintained high conviction positions in companies operating in low cost basins; or that are positioned to benefit from growth in US LNG exports.
Source : Company data, First Sentier Investors, as of 31 October 2023.
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