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Specialist in Asia Pacific, Japan, China, India and South East Asia and Global Emerging Market equities.

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Stewart Investors manage investment portfolios on behalf of our clients over the long term and have held shares in some companies for over 20 years. They launched their first investment strategy in 1988.

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Global Listed Infrastructure Monthly review and outlook

Global Listed Infrastructure Monthly review and outlook

A monthly review and outlook of the Global Listed Infrastructure sector.

Market review - as at September 2020

Global Listed Infrastructure held up relatively well in September as global equities’ recent momentum faltered. The FTSE Global Core Infrastructure 50/50 index decreased -1.2% in September, while the MSCI World index^ ended the month -3.4% lower.

The best performing infrastructure sectors included Multi-Utilities (+2%) and Electric Utilities (+1%) as investors rotated towards stable, lower beta assets. Toll Roads (+2%) also gained, helped by improving traffic volumes for Asia-Pacific operators.

The worst performing infrastructure sector was Pipelines (-7%), which lagged on a growing awareness of the longer term structural challenges facing fossil fuel demand (decarbonisation and renewables growth, electric vehicles rollout, potential competition from hydrogen). During the month, California’s Governor signed an order that would prohibit the sale of diesel and petrol passenger cars in the state by 2035; and China committed to a 2060 net zero carbon emissions target.

The best performing infrastructure regions were the United Kingdom (+4%), where utilities were buoyed by the prospect of more favourable regulatory outcomes than previously anticipated; and Australia / New Zealand (+4%), whose roads and airports gained on an improving coronavirus situation. The worst performing infrastructure region was Latin America (-4%), reflecting underperformance from Brazil’s broader market.

 

 

^ 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 Fund 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.

The portfolio remains positioned with toll roads as its largest sector overweight. Valuation multiples still imply multi-year traffic declines, in contrast to the improvements that toll road companies referenced in recent quarterly earnings updates. While increased flexibility to work-from-home may result in adjustments to traffic, we see clear evidence that people prefer to travel by private car than by public transport in order to maintain social distancing.

The portfolio’s overweight exposure to gas utilities consists of specialist North American and European companies operating in niche market areas; a Japanese operator with a strong balance sheet trading at undemanding valuation multiples; and Chinese gas utilities which are positioned to benefit from a structural shift from coal to cleaner energy sources, in a region that has so far coped well with the coronavirus outbreak.

The Fund now has a roughly neutral exposure to Multi/Electric utilities, where steady share price gains have reduced some of the mispricing previously seen in this sector. Utilities still represent a substantial part of the portfolio in absolute terms. Regulated utility earnings should be materially more resilient than those of the broader market in the event of an extended economic slowdown or recession; and low interest rates will be supportive of valuation multiples.

We remain cautious on the Airports sector. A sustained recovery in airline passenger numbers appears a remote prospect for many airports, given traveller wariness and persistently high coronavirus case numbers. A staggered re-opening of airports appears likely to start with domestic or regional flights, which are less valuable than international flights. The silver lining is that many airports’ regulated assets are now under-earning their allowed returns, giving scope for future regulatory terms to be more generous than previously expected.

 

 

Source : Company data, First Sentier Investors, as of end of September 2020

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 document 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. 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 document may not be edited and/or reproduced in whole or in part without the prior consent of FSI.

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Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of First Sentier Investors’ portfolios at a certain point in time, and the holdings may change over time.

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.

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