Global Listed Infrastructure Monthly review and outlook

Market review - as at February 2021

Global Listed Infrastructure delivered mixed returns in February as mounting hopes of an economic recovery, along with concerns for rising inflation, pushed bond yields higher.

The best performing infrastructure sectors were Airports (+8%) and Railroads (+7%), as investors anticipated a medium term return to normalised passenger volumes. The worst performing infrastructure sectors were Water / Waste (-7%) and Electric / Multi-Utilities (-5%), as investors favoured higher beta sectors. Volatility in the Texas energy market, caused by unusually cold weather, also weighed on some North American utility businesses.

The best performing infrastructure regions were Asia ex-Japan (+9%) and Europe ex-UK (+8%), with transport infrastructure leading the gains. The worst performing infrastructure region was the utilities-focused United Kingdom (-5%).

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 improve weak 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 long time frames.

These growth opportunities were highlighted this month. Warren Buffett’s annual shareholder letter noted the material transmission growth opportunities being pursued by Berkshire Hathaway’s utilities; while Bill Gates’ new book “How to Avoid a Climate Disaster” notes the crucial role that upgraded transmission infrastructure has to play in responsibly addressing climate change.

As vaccine programs ramp up, there is also scope for a recovery in traffic / passenger volumes across coronavirus-impacted infrastructure sectors such as toll roads, airports and passenger rail.

From a relative perspective, a slow or uneven economic recovery would favour structural themes — such as investment in mobile telecom networks to support increasing demand for mobile data — over cyclical growth opportunities. We also note that financial market pessimism towards global listed infrastructure and optimism towards higher risk assets has driven an increase in intrinsic value across the asset class. This bodes well for future global listed infrastructure performance.

Source : Company data, First Sentier Investors, as of end of February 2021

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