A monthly review and outlook of the Global Listed Infrastructure sector.
Market review - as at August 2021
Global Listed Infrastructure gained in August as investor sentiment remained positive, despite evidence of supply chain disruption and labour market disconnects alongside the ongoing spread of Delta variant coronavirus.
The two best performing infrastructure sectors for a second consecutive month were Electric Utilities (+4%) and Water / Waste (+3%). US electric utilities were supported by a positive June quarter earnings season, and a renewed focus on their longer term opportunities to invest in transmission infrastructure and renewables. Towers / Data Centers (+3%) continued their strong run as structural growth characteristics remained in demand. The worst performing infrastructure sector was Gas Utilities (-1%). Chinese gas utilities underperformed after June quarter earnings results from ENN Energy (-5%, not held) failed to meet the market’s bullish growth rate expectations.
The best performing infrastructure region was Asia ex-Japan (+6%). Improving investor sentiment underpinned share price gains for the region’s airports; while its port operators were supported by robust volume growth. The worst performing infrastructure region was Latin America (-2%). A clash between Brazil’s president and its judges raised concerns for the country’s political stability ahead of the country’s 2022 presidential election, and weighed on the country’s infrastructure stocks.
All stock and sector performance data expressed in local currency terms. Source: Bloomberg.
Market outlook and strategy
The Portfolio 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 outlook for the asset class is positive. Government attempts to bolster economic fundamentals through infrastructure and green energy stimulus plans are likely to benefit many global listed infrastructure firms. In particular, the ongoing repair and replacement of old energy transmission and distribution grids, along with the accelerating build-out of renewables, should represent a steady source of utility earnings growth over many years. Recent extreme weather conditions in the US — wetter and windier conditions than normal in the eastern half of the country; droughts and wildfires in the west — have highlighted the pressing need to improve the resilience of that country’s infrastructure networks.
There remains scope for a material recovery in traffic / passenger volumes across transport infrastructure sectors such as toll roads, airports and passenger rail, as vaccine programs ramp up globally. Reflecting this, toll roads represent the portfolio’s largest sector overweight. Traffic volumes have proved more resilient than those of other transport infrastructure assets; and toll roads are likely to be the first to see a return to normal demand levels. The stop-start nature of the recovery across different regions and industries, along with strong post-pandemic demand, is presenting a challenge to global supply chain networks. During the month, the number of container ships waiting to unload their cargos onto trucks and freight rail trains at California’s two largest ports rose to 44, compared to a typical number of either zero or one.
We are also cognizant of potential shifts in the political landscape, with upcoming elections in California, Canada, Germany and Japan (to be followed by France and Brazil next year). Analysis of political and regulatory risk represents a core part of our due diligence. We seek to assess, manage and balance potential risks of this nature by having a deep understanding of the regulatory frameworks in each market, and how those may change with elections; and by meeting with regulators in the various jurisdictions we own assets in.
Source : Company data, First Sentier Investors, as of 31 August 2021.
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