A monthly review and outlook of the Global Listed Infrastructure sector.
Market review - as at June 2022
Global Listed Infrastructure decreased as central bank tightening measures, elevated inflation levels and concerns for lower economic growth rates continued to weigh on financial markets.
The best performing infrastructure sector was Toll Roads (+1%), which were supported by the appeal of inflation-linked tolls and the prospect of takeover activity. The worst performing infrastructure sector was Energy Midstream (-10%), on the view that a slowing economic growth rate would reduce demand for hydrocarbons.
The best performing infrastructure region was Japan (+7%), traditionally viewed as a defensive haven during volatile markets. Its utilities performed strongly on the view that the record-breaking heatwave currently enveloping the country would lead to higher air conditioner usage and increased electricity demand. The worst performing infrastructure region was Latin America (-7%), as investor interest in higher beta areas of the market waned.
All stock and sector performance data expressed in local currency terms. Source: Bloomberg.
Market outlook and Strategy
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.
Against a challenging economic backdrop, listed infrastructure remains supported by a number of structural growth drivers. We remain optimistic about the substantial investment opportunities associated with the decarbonisation of the world’s energy needs. Utilities, which represent about a half of the listed infrastructure opportunity set, are positioned to derive steady, regulated earnings growth by building solar and wind farms, and by upgrading and expanding the networks needed to connect these new power sources to the end user. Portfolio holdings Entergy, NextEra Energy and PPL Corp were amongst the US utilities that increased their earnings guidance in June as a result of additional investment in these areas — a welcome contrast to the turmoil seen elsewhere in financial markets.
Digitalisation is another key theme for the asset class. Structural growth in demand for mobile data (underpinned by an ever-growing reliance on digital connectivity) continues to support steady earnings growth for Towers and Data Centres, insulating them from the ebbs and flows of the broader global economy. The changes required during the pandemic have already led to a greater reliance on wireless data in many people’s everyday lives. The adoption of 5G technology over the medium term will require networks to handle increased data speed, and a much higher number of connected devices.
The asset class also continues to receive valuation support from the unlisted market. The expected takeover offer for Atlas Arteria would make it the latest Australian listed infrastructure company to be acquired by private buyers, following the acquisitions of Spark Infrastructure, Ausnet Services and Sydney Airport during the past 12 months. These offers illustrate the appeal that these long life and often unique assets present to sovereign wealth funds, private equity, unlisted infrastructure managers and trade buyers alike.
Source : Company data, First Sentier Investors, as of 30 June 2022.
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