Global Listed Infrastructure monthly review and outlook

Global Listed Infrastructure gave up ground in December following strong ytd gains. The FTSE Global Core Infrastructure 50/50 index returned -5.8%, while the MSCI World index^{^} ended the month -2.6% lower.

The best performing infrastructure sector was Toll Roads (+4%). European and Asia-Pacific operators held up well on robust traffic volumes, modest valuation multiples and the prospect of easing political headwinds. The worst performing infrastructure sector was Towers / Data Centres (-10%), which fell as the US 10-year treasury yield approached its highest levels of the year.

The best performing infrastructure region was Australia / New Zealand (+6%), reflecting strong returns from local toll road and airport stocks. The worst performing infrastructure region was the United States (-7%), as the country’s mobile towers, railroads and utilities underperformed.

^{^}MSCI World Net Total Return Index (USD) is provided for information purposes only. Index returns are net of tax.Data to 31 December 2024. Source: First Sentier Investors / Lipper IM. All stock and sector performance data expressed in local currency terms. Source: Bloomberg.

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 remain the portfolio’s largest sector overweight. Although the earnings growth rate of these companies may reduce as inflation eases, free cash flow generation should remain robust. This will reinforce balance sheet strength and increase share buyback opportunities. The perception of lower political and regulatory risks in Australia, France and Latin America should also provide a tailwind to these stocks.

We are positively disposed towards both freight and passenger rail stocks. North American freight railroads have endured an unprecedented three-year freight recession, which the sector appears well positioned to emerge from in 2025. Improved haulage volumes, along with better service metrics, lower capital employed and the sector’s strong pricing power, bode well for shareholders. Passenger rail stocks look mispriced, with potential upside from growth in travel spend over the medium term. 

A substantial portion of the portfolio consists of utilities / renewables. These stocks face higher capital expenditure needs to meet the increases in electricity demand being driven by AI, data centres, manufacturing onshoring and electrification, particularly in the US. They are likely to need to raise substantial amounts of equity in 2025, to meet these needs. However, this theme should also enable the sector’s Earnings per Share growth rate to accelerate from a typical range of between 3% and 5% per annum to between 6% and 8% per annum, representing a meaningful positive shift.

The portfolio remains underweight energy midstream. Within this space, the portfolio has overweight exposure to US energy midstream stocks but is substantially underweight ex-US energy midstream companies – notable large-cap, slower growing operators such as Enbridge Inc. and TC Energy. We prefer US-listed operators servicing low-cost basins; or that are positioned to benefit from growth in US exports. An elevated oil price, robust US LNG export levels and a disciplined approach to capital expenditure are enabling these companies to generate strong free cash flows.

Source :  Company data, First Sentier Investors, as of 31 December 2024.