A monthly review and outlook of the Global Listed Infrastructure sector.
Market review - as at December 2021
Global Listed Infrastructure rallied into the year-end, helped by indications that the contagious Omicron variant may prove less economically disruptive than initially feared.
The best performing infrastructure sector was Towers / Data Centres (+11%), aided by the prospect of additional investment into mobile data networks to enable the ongoing 5G rollout. Utilities (+8% to +10%) also performed well as investors identified relative value following a sustained period of underperformance compared to the broader market. The worst performing infrastructure sector, Pipelines (+1%), paused after delivering substantial gains earlier in the year.
The best performing infrastructure region was the United States (+9%), owing to positive returns from its Towers, Utilities and Railroads. The worst performing infrastructure region was Australia / New Zealand (+3%), reflecting relatively muted gains from its transport 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 in 2022 is positive. We remain optimistic about the substantial investment opportunities associated with the decarbonisation of the world’s energy needs. Utilities, which represent about a half of the global listed infrastructure opportunity set, 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. Technology advances and lower costs for utility-scale battery storage will enable renewables to represent an ever-greater share of the overall electricity generation mix. In the medium term, the roll-out of electric vehicles is then expected to provide an additional boost to utilities — first via investment opportunities associated with linking EV charging stations to the grid; and then via higher overall demand for electricity. The scale of investment opportunities currently on offer across the utilities space does not yet appear to be fully reflected in valuation multiples.
In addition, there remains scope for further recovery in traffic / haulage / passenger volumes for toll roads, railroads and airports. While the emergence of new coronavirus variants may affect the timing of this recovery, a return to normality is inevitable. Markets are becoming less sensitive to coronavirus news flow as the pandemic progresses, and as vaccines and booster shots are administered. Tollroads have the potential to deliver strong earnings growth as traffic recovers, taking share from public transport. Freight railroads should benefit from a reduction in supply chain disruptions — as congestion eases, high consumer savings and low inventory levels are likely to drive demand. However airports remain potentially vulnerable to changing travel rules, with travellers still showing a clear preference for leisure over business destinations.
From a valuation perspective, a large gap remains between the valuations of public market (listed) and private market (unlisted) infrastructure assets. This gap should provide listed companies with opportunities to sell non-core assets at premiums to their listed valuations. This will enable listed infrastructure companies to strengthen their balance sheets and simplify their core businesses, leading them to trade at higher valuation multiples. Undemanding valuation multiples and still-low interest rates also increase the chance of listed infrastructure M&A activity. This would represent a continuation of the theme seen in 2021, when sovereign wealth funds, private equity, unlisted infrastructure managers and trade buyers alike demonstrated a keen appetite for listed infrastructure companies. More broadly, financial market pessimism towards global listed infrastructure over the past two years, and continued optimism towards higher risk assets, have made the relative value on offer within the asset class vs general equities increasingly compelling.
Source : Company data, First Sentier Investors, as of 31 December 2021.
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