A monthly review and outlook of the Global Listed Infrastructure sector.
Market review - as at July 2023
Global Listed Infrastructure rose in July, aided by solid quarterly earnings numbers and easing inflation rates.
The best performing infrastructure sector was Railroads (+4%), with North American freight rail stocks supported by improving service metrics and indications that rail cost inflation may be peaking. Gains in this sector were led by Union Pacific (+13%, held), reflecting a positive investor response to its new CEO.
The worst performing infrastructure sector was Towers / Data Centres (-3%) as US tower operators underperformed on concerns for a challenging leasing environment. Mobile network equipment maker Eriksson announced declining North American sales; while Nokia noted delays for some North American projects and downgraded 2023 guidance.
The best performing infrastructure region was Japan (+3%), reflecting continued outperformance from the country’s electric utilities. The worst performing infrastructure region was Canada (-2%), owing primarily to underperformance from its large cap energy midstream stocks.
Market outlook and Strategy
The Portfoilio 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 outlook for the asset class is positive. Valuations are appealing compared to historical levels; balance sheets and dividend payout levels are healthy. The most recent series of quarterly earnings results showed transport infrastructure continuing to recover from the effects of the covid pandemic; while utility and tower / data centre earnings maintained steady upward trajectories. In the event of an economic slowdown, earnings from this space are expected to be more resilient than those of global equities owing to the essential service nature of these businesses, and their regulated / contracted earnings streams.
Public policy support for infrastructure investment remains strong globally, particularly for the replacement of aged infrastructure assets and the buildout of renewables. Utilities are in the midst of a multi-decade structural growth story, driven by decarbonisation, electrification and resiliency spend.
In the communications infrastructure space, structural growth in demand for data continues to support earnings growth in the towers space. Concerns for higher interest rates and potential softness in tower leasing demand in the near term are now better reflected in valuation multiples. Data centres remain positioned to benefit from growing demand for cloud computing, driven in part by the recent surge in AI interest.
Transport infrastructure has seen a recovery in volumes, aided by the return-to-office trend and a modal shift away from public transport. For many toll roads, the high inflation of 2022 has now translated into toll uplifts. Traffic data from the Airports sector has highlighted a consistently keen appetite to travel, with the strongest recovery seen at tourism-focused airports. Travellers are now returning to the air in countries that had been slower to reopen, such as China and Japan.
Source : Company data, First Sentier Investors, as of 31 July 2023.
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