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A monthly review and outlook of the Global Listed Infrastructure sector.
Market review - as at March 2023
Global Listed Infrastructure increased in March as financial markets shrugged off mid-month turbulence in the banking sector.
The best performing infrastructure sectors included Utilities / Renewables (+4%), Water / Waste (+3%) and Towers / DCs (+3%). These interest-rate sensitive sectors were supported by the view that recent banking sector weakness, triggered in part by higher bond yields, may cause the pace of central bank interest rate rises to slow. During the month the US 10 year treasury yield declined from 3.9% to 3.5%.
The worst performing infrastructure sector was Railroads (flat). Gains for Japanese passenger rail stocks, in anticipation of normalising traffic volumes, were offset by declines for US freight rail on lacklustre haulage volumes in the March quarter.
The best performing infrastructure region was Latin America (+5%). Brazil’s listed infrastructure companies rose sharply on hopes that a dispute about government spending levels had been resolved. The worst performing infrastructure region was Australia / NZ (-1%), where investors took profits following recent strong gains.
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.
The outlook for the asset class is positive. Balance sheets and dividend payout levels are generally healthy, and appear well placed to weather a deteriorating economic backdrop. We are conscious of potential headwinds in the form of higher interest costs, and elevated regulatory and political risk. Overall however, 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 typically 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. Decarbonisation, electrification and resiliency spend represent large and growing investment opportunities for these companies. These investments drive utilities’ rate base growth, leading in turn to earnings growth.
Transport infrastructure is benefitting from a recovery in volumes as travellers return to the air; and as the return-to-office trend ramps up. For many toll roads, the high inflation of 2022 will translate into toll uplifts over coming quarters, supporting healthy earnings growth. Traffic data from the Airports sector has highlighted a keen appetite to travel, with the strongest recovery seen at tourism-focused airports.
Source : Company data, First Sentier Investors, as of 31 March 2023.
Important information
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