A monthly review and outlook of the Global Listed Infrastructure sector.
Market Review - as at June 2020
Global Listed Infrastructure gave up ground in June as the partial reopening of the global economy and brightening macroeconomic data saw investors rotate away from defensive assets. The best performing infrastructure sector was Water / Waste (flat), which delivered stable returns as general equities rose. Toll Roads (flat) also fared relatively well as traffic volumes for European, Chinese and Australian roads maintained upward trends.
The worst performing infrastructure sector was Electric Utilities (-5%), owing to a lack of appetite for lower beta assets, and concerns that bad debts may weigh on cash flow. Pipelines (-4%) gave up some of the previous month’s strong returns, as a result of their still-clouded growth outlook.
The best performing infrastructure region was the United Kingdom (+6%), as its utilities announced resilient earnings numbers and the market welcomed the prospect of widespread relaxations of the country’s lockdown from July 4th. The worst performing infrastructure region was Japan (-6%), where the general population’s cautious attitude to coronavirus - despite the country’s relatively low caseload to date – translated to muted passenger traffic volumes and a worse-than-expected reading for business confidence in the June quarter.
All stock and sector performance data expressed in local currency terms. Source: Bloomberg.
Market Outlook and Strategy
We invest 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.
While the macroeconomic outlook remains hard to predict and will depend largely on coronavirus developments / progress, the sharp recovery seen in financial markets during the June quarter appears to be implying an imminent V-shaped recovery. While conceivable, we remain alert to the risk of second waves, prolonged recessions and slow recoveries.
Against a more challenging backdrop, cyclical growth would become less valuable than the long term structural earnings growth drivers offered by many infrastructure assets. Examples include the build-out of renewable energy; increasing data mobility / connectivity needs being met by mobile towers and data centres; the electrification of transportation; the reduction of urban congestion; and the ongoing replacement of aged infrastructure assets.
Further, infrastructure could be the target of near term economic stimulus measures. Investment in infrastructure remains highly popular across society, and on both sides of the political divide. Private sector infrastructure investment could provide a useful way for politicians to boost anaemic economic growth rates and reduce high unemployment levels.
Source : Company data, First State Investments, as of end of June 2020
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