A monthly review and outlook of the Global Listed Infrastructure sector.
Market review - as at January 2021
Global Listed Infrastructure gave up ground in January as a cautious mood prevailed in financial markets, despite the start of global vaccination campaigns. The best performing infrastructure sector was Pipelines (+6%), as robust North American hydrocarbon export volumes and improving commodity prices buoyed investor sentiment. Water / Waste (+1%) also ended the month in positive territory, on the enduring appeal of their defensive characteristics. The worst performing infrastructure sectors were Airports (-7%) and Toll Roads (-5%) as ongoing coronavirus lockdown measures weighed on passenger / traffic volumes, particularly in Europe and Latin America.
The best performing infrastructure region was Japan (+4%). The country’s electric utilities rallied due to a surge in wholesale electricity prices, and on speculation that Tokyo Electric Power (+47%, not in our focus list) may be allowed to restart one of its nuclear plants, which have been closed since the Fukushima nuclear disaster in 2011. Gains for Canada (+3%) reflected positive returns from its large-cap pipeline companies. The worst performing infrastructure regions were Europe ex-UK (-6%) and Latin America (-4%), owing to airport and toll road underperformance.
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, ports, 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.
Toll roads represent the portfolio’s largest sector overweight. We believe these companies represent exceptional value at current levels. 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 as vaccine programs are rolled out. The portfolio is also overweight Towers / Data Centres. Exceptionally strong growth in 2020 from cloud computing leaders Amazon Web Services and Microsoft Azure provided the latest reminder that data mobility / connectivity needs are set to increase further in coming years, to the benefit of the towers and data centres.
A roughly neutral but large absolute exposure to Multi / Electric utilities has been maintained. The resilience and predictability of regulated utility earnings — along with the growth potential associated with the transition to renewables — does not appear to be fully appreciated by listed markets.
The portfolio is underweight the Airports sector. It remains to be seen how quickly consumer behaviour will return to normal. Business travel may never regain previous levels. The decision by Singapore and Hong Kong to delay the launch of an air “travel bubble”, originally scheduled for mid-November but now pushed back to 2021, serves as a reminder of the logistical challenges still facing the sector. The portfolio’s exposure is focused primarily on higher quality European operators. An underweight exposure to the Pipelines sector has also been maintained. While the sector has delivered robust gains in recent months, we remain conscious of the structural headwinds that these companies could face as Net Zero initiatives gather pace.
Source : Company data, First Sentier Investors, as of end of January 2021
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