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Specialist in Asia Pacific, 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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Please read the following important information for First Sentier Global Listed Infrastructure Fund

• The Fund invests primarily in global listed infrastructure and infrastructure-related equity securities or equity related securities worldwide. Investments in infrastructure projects may involve risks including projects not being completed on time and within budget, changes in environment laws and regulations.

• The Fund’s investments may be concentrated in a single and limited/specialist sector or in fast growing economies which may have higher volatility or greater loss of capital than more diversified portfolios. The Fund may also expose to RMB currency and conversion risk.

• Small/ mid-capitalisation securities may have lower liquidity and their prices are more volatile to adverse economic developments.

• The Fund may use FDIs for hedging and efficient portfolio management purposes, which may subject the Fund to additional liquidity, valuation, counterparty and over the counter transaction risks

• For certain share classes, the Fund may at its discretion pay dividend out of capital or pay fees and expenses out of capital to increase distributable income and effectively a distribution out of capital. This amounts to a return or withdrawal of your original investment or from any capital gains attributable to that, and may result in an immediate decrease of NAV per share.

• It is possible that a part or entire value of your investment could be lost. You should not base your investment decision solely on this document. Please read the offering document including risk factors for details.

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 May 2024

Global Listed Infrastructure rose in May as structural growth themes proved supportive. The FTSE Global Core Infrastructure 50/50 index returned +4.9% while the MSCI World index^ ended the month +4.5% higher.

The best performing infrastructure sector was Towers / Data Centres (+11%) aided by easing bond yields (towers) and a positive demand outlook for data storage (DCs). Utilities / Renewables (+7%) increased on the growing view that the sector was well positioned to benefit from a growing need for electricity, particularly from carbon-free sources. The worst performing infrastructure sector was Railroads (flat), which paused against a backdrop of lacklustre North American freight haulage volumes.

The best performing infrastructure region was Japan (+8%), led by strong gains for the country’s electric utilities. The worst performing infrastructure region was the UK (-3%), reflecting the impact of a substantial capital raising carried out by large-cap electric utility National Grid. The announcement of an earlier-than-expected general election raised renewed concerns around political risk for the country’s water utilities.

 

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

Fund performance

The Fund returned +2.4% after fees in May, 254bps behind the FTSE Global Core Infrastructure 50/50 Index (USD, Net TR). 

The best performing stock in the portfolio was large-cap US utility and leading renewables developer NextEra Energy (+19%). This substantial gain reflected a growing investor awareness of the increasing demand for power generation that many US utilities are currently facing, driven by data centres and the growth of AI (which typically consumes more energy than other data centre customer types). Demand is particularly keen for carbon free energy sources. As the largest renewables developer in the US, NextEra Energy appears particularly well placed to benefit. Southern Company (+10%) and Dominion Energy (+7%) were amongst a number of other US utility stocks that rose during the month, on the view that they were also likely to fare well in this environment. Both companies announced better-than-expected March quarter earnings, aided in part by healthy demand for electricity.

Mobile tower companies American Tower (+14%) and Crown Castle (+9%) increased as interest rates receded from recent highs. Crown Castle owns ~40,000 US macro towers, ~115,000 small cell antenna systems (either on-air or under contract) and 90,000 route miles of fibre optic cabling. The company is currently carrying out a strategic review of its fibre business. The sale of these assets, for a reasonable price, could represent a positive catalyst for its stock price.

The portfolio’s Chinese infrastructure stocks — water utility Guangdong Investment (+8%), airport operator Beijing Airport (+6%), gas utility ENN Energy (+6%) and toll road operator Jiangsu Expressway (+6%) — built on April’s strong gains. In the absence of material stock-specific news, these moves appear to have been primarily driven by optimism around government support measures for China’s property market.

The worst performing stock in the portfolio was Brazil toll road operator CCR (-2%). The company announced resilient March quarter earnings numbers featuring strong operational performance from its toll road division, but lagged in sympathy with the broader Brazil stock market. Mexican airport operator ASUR (-1%) gave up ground as investors took profits following a series of strong gains in recent months.

US freight rail operators Norfolk Southern (-2%) and Union Pacific (-1%) also underperformed. Sentiment towards Norfolk Southern appears to have been affected by concerns around the pace at which it will improve its operating metrics, having largely rebuffed the approach of activist investor Ancora Holdings. Recent downbeat comments from Union Pacific’s management team on the pricing environment may have weighed on its share price.

Fund activity

The Fund initiated a position in large-cap UK utility National Grid after the company’s recent £7 billion capital raising removed a key overhang from the stock. Britain’s largest electricity transmission and distribution business, National Grid plans to invest around £60 billion across the next five years to modernise and expand the country’s electricity grid as the economy decarbonises. Under its regulatory framework, the company will recoup (and earn a reasonable return) on the money it invests into these substantial projects.

The Fund also bought shares in US-listed electric utility AES Corp, which owns and operates a geographically-diversified portfolio of energy generation assets. The company is seeking to divest non-core assets and focus on the build-out of renewables in the US. This strategy is likely to enable the company to benefit from the increasing demand for energy that is being driven by data centres and AI, industrial onshoring and EV charging. 

The Fund added Japanese airport operator Japan Airport Terminal, owner and operator of the terminals at Japan’s Haneda Airport in Tokyo. Earnings are derived from passenger processing charges and retail activities within the terminals. Following a sustained period of underperformance vs the broader Japanese market, the company is trading at appealing valuation multiples. It appears well-positioned to benefit from an expected increase in inbound tourism, aided by the weak yen making Japan an attractive destination for overseas travellers, and the expected recovery in Chinese inbound tourists.

The Fund also bought shares in GFL Environmental, the fourth-largest North American waste management company with operations in every Canadian province and in 24 US states. Despite strong earnings growth since listing in 2020, the company currently trades at a discount to peers on concerns around its current borrowing levels. From here, disciplined balance sheet management and favourable operation conditions for the waste management sector give the stock scope to close the valuation gap that currently exists between it and peers.

A holding in Spanish airport operator AENA was sold after strong share price gains since initiating the position in June 2020 reduced mispricing; and on the view that a positive outlook for traffic volumes during the European summer holiday season is already reflected in valuation multiples.

Market outlook and fund positioning

The Fund 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.

Earnings growth for the asset class is likely to be underpinned by a number of structural growth themes over coming years. We are optimistic about the substantial investment opportunities associated with the decarbonisation of the world’s energy needs. Utilities are positioned to derive steady, regulated earnings growth by building solar and wind farms, and by upgrading and expanding the networks needed to connect these new power sources to the end user.

In addition to the energy transition, electricity demand levels in North America are also set to increase in absolute terms, after years of maintaining roughly consistent levels. This should provide a further tailwind for the earnings of many regulated US utility stocks. It is also likely to bolster the need for transition fuels such as natural gas, which have a crucial role to play in maintaining energy reliability and affordability. As well as benefitting utilities, this is also likely to drive additional demand for North American energy midstream storage and transportation assets.

Digitalisation is another key theme for the asset class. We expect structural growth in demand for mobile data (underpinned by an ever-growing reliance on digital connectivity) to support long-term earnings growth for Towers. The adoption of 5G technology over coming years will require networks to handle increased data speed, as well as a much higher number of connected devices. The surge of interest in AI is driving data center demand, as well as boosting the need for electricity. 

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

These figures refer to the past. Past performance is not a reliable indicator of future results. For investors based in countries with currencies other than the base currency of the share class, the return may increase or decrease as a result of currency fluctuations. Performance data calculated since the launch date. Performance data is calculated on a net basis by deducting fees incurred at fund level (e.g. the management and administration fee) and other costs charged to the fund (e.g. transaction and custody costs), save that it does not take account of initial charges or switching fees (if any). Income reinvested is included on a net of tax basis. First Sentier Global Listed Infrastructure Fund, Class I (Distributing) USD shares. Benchmark is the FTSE Global Core Infra 50/50 TR Index from 1 April 2015, prev. UBS Global Infra & Utilities 50/50 TR Index. 

 

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, FSSA Investment Managers, Stewart Investors, RQI Investors and Igneo Infrastructure Partners are the business names of First Sentier Investors (Hong Kong) Limited.

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 FSI’s 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.

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.