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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 December 2022

Global Listed Infrastructure gave up ground in December as renewed concerns for recession in 2023 weighed on financial markets. 

The best performing infrastructure sectors in this risk-off environment were Utilities / Renewables (flat) and Water / Waste (flat). Much of the US was affected by severe winter storms. However, utilities’ regulated business models typically treat weather-related costs as a pass-through, meaning that they should be able to recover costs from customers over time. The worst performing infrastructure sector was Energy Midstream (-10%) as investors took profits from the best performing infrastructure sub-sector ytd (and of 2021).

The best performing infrastructure regions were Japan (+1%), where electric utilities were buoyed by government approval of a plan promoting the use of nuclear power; and Asia ex-Japan (+1%), which rose as China lifted its stringent zero-Covid policies. The worst performing infrastructure region was Europe (-6%), as high energy prices and a lacklustre economic outlook weighed on the region’s infrastructure stocks.

Market outlook and Strategy

The Strategy 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. 

The asset class remains positioned to benefit from several long term, structural growth drivers. 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 a greater share of the overall electricity generation mix over time. The Inflation Reduction Act, signed into law in August 2022, is expected to provide greater certainty of earnings growth for US utilities, particularly those involved in the transition away from fossil fuels and towards renewables.

Digitalisation is another key long term theme for the asset class. The changes required during the pandemic accelerated a shift towards the use of wireless data in many people’s everyday lives. While rising interest rates weighed on Towers and Data Centres earlier in 2022, structural growth in demand for mobile data (underpinned by the growing reliance on digital connectivity) continues to support steady revenue growth for these stocks. 2023 is likely to see the continued rollout of 5G mobile technology. This will require networks to handle increased data speed, and a much higher number of connected devices, to the benefit of towers.

We also see continued evidence of recovery within the transport infrastructure space. Toll roads represent exceptional value at current levels, with traffic volumes (particularly car traffic) proving resilient. These assets are likely to fare relatively well in a higher inflation environment. Many toll roads have concession agreements that specify how prices can be increased, with an option to follow the inflation rate or an agreed percentage — whichever is higher. As a result, year-on-year toll uplifts of between 4% and 7% are likely for many developed market roads. Traffic data from the Airports sector has highlighted a keen appetite to travel, with the strongest traffic recovery seen at tourism-focused airports. We continue to favour leisure airports with a strong network of low cost airlines, such as Spain’s AENA or Mexico’s ASUR.

Source : Company data, First Sentier Investors, as of 31 December 2022.

Important information

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