Global Listed Infrastructure Monthly review and outlook

Global Listed Infrastructure rose strongly in July, reflecting a rotation away from higher beta market sectors including technology, in favour of more defensive assets.

The best performing infrastructure sector was Towers / Data Centres (+12%), supported by healthy earnings numbers and easing interest rates. The US 10-year Treasury yield fell from 4.4% to 4.0% during the month. A positive update from telecommunications / networking company Ericsson (+11%, not in our Focus List), which reported improving demand for its network equipment in North America, also buoyed sentiment towards Towers.

The worst performing infrastructure sector was Airports (flat). Several airlines indicated that demand for air travel may now be softening, following the post-Covid phenomenon of “revenge travel”. Spain’s largest airport operator AENA (-7%, not held) fell on concerns that Barcelona Airport, a key asset, may be separated from the company as moves to provide greater autonomy to the Catalonian region progressed.

The best performing infrastructure region was the UK (+10%). The country’s water and electric utilities gained against a backdrop of greater political certainty, following a convincing victory for the Labour Party in the country’s general election. Ofwat, the water regulator for England and Wales, released Draft Determinations setting out its provisional assessment of allowed revenues and performance targets for water utilities between 2025 and 2030. Listed water utilities including Pennon (+13%, not held), Severn Trent (+8%, held) and United Utilities (+5%, not held) increased as investors welcomed the proposals.

The worst performing infrastructure region was Japan (-3%) as the country’s electric utilities (not in our Focus List) gave up ground following gains earlier in the year.

The Portfolio 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.

Since early 2022, with rising interest rates a key concern for investors, global listed infrastructure has underperformed broader equity markets and delivered roughly flat returns. A backdrop of “risk-on” sentiment has seen higher growth areas of the market, particularly technology, outshine lower beta assets. Political uncertainty - always a key risk for infrastructure investors - has also been front of mind, with a large proportion of the world’s population eligible to vote in an election during 2024.

However, the headwinds that have faced global listed infrastructure over this period may now be about to turn into tailwinds. In recent weeks central banks in Canada and the UK have cut interest rates, and bond yields have fallen sharply. Concerns that the global economy may be starting to slow appears to be drawing investors back towards more defensive assets, including global listed infrastructure. Political uncertainty has reduced following significant recent elections in India, Mexico, France and the UK, albeit with the US presidential election still to come.

Listed infrastructure’s regulated or contracted earnings should prove supportive in the event of a deteriorating economic environment. We also remain optimistic about the structural growth themes that the asset class is positioned to benefit from, including the energy transition (utilities), digital connectivity (towers), growth in AI (data centers) and rising demand for electricity (utilities, energy midstream).