Global Listed Infrastructure Monthly review and outlook

Market review - as at June 2021

Global Listed Infrastructure delivered mixed returns in June, as economic reopening optimism was tempered by coronavirus variant concerns. The best performing infrastructure sector was Towers (+6%), on the view that the rollout of next-generation networks would be supportive of tower earnings growth. Lower bond yields provided an additional tailwind to these interest rate sensitive companies. Pipelines (+5%) also gained against a backdrop of higher energy prices and increasing hydrocarbon demand.

The worst performing infrastructure sector was Multi-utilities (-3%), as investors sought assets with more sensitivity to increasing levels of economic activity. In the Railroads (-2%) sector, Japanese passenger rail operators gained as the country’s vaccine rollout accelerated. However North American freight rail stocks lagged despite consistently strong volumes, on concerns that unusually hot weather in the US and Canada may affect Agriculture haulage volumes.

The best performing infrastructure region was Canada (+3%), led higher by substantial gains for its pipeline operators. The worst performing infrastructure region was Latin America (-2%), reflecting underperformance from Brazil’s utility stocks.

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 such as barriers to entry and pricing power that we believe can provide investors with inflation-protected income and strong capital growth over the medium-term.

A key question for investors is whether current rising prices are a transitory phenomenon, or whether the global economy is now about to embark on a sustained period of higher inflation. Infrastructure assets are typically able to increase prices in line with inflation. This can be achieved via the terms of their regulatory frameworks, concession agreements or customer contracts; or in some cases by operating from a strong strategic position with limited competition. Accordingly, infrastructure assets can often maintain and grow earnings in real terms, supporting a stable and growing distribution yield over time. This history gives us confidence that listed infrastructure would fare relatively well in the event of a higher inflation environment.

The asset class is also set to benefit from a number of other positive drivers. Government attempts to bolster economic fundamentals through infrastructure and green energy stimulus plans are likely to prove supportive of 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 many years.

Ever-increasing demand for mobile data / connectivity continues to underpin steady earnings growth for Towers and Data Centres, insulating them from the ebbs and flows of the broader global economy. There is also scope for a material recovery in traffic / passenger volumes across coronavirus-impacted infrastructure sectors such as toll roads, airports and passenger rail, as vaccine programs ramp up globally.

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

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