A monthly review and outlook of the Global Listed Infrastructure sector.
Market Review - as at May 2020
Global Listed Infrastructure climbed in May as investors anticipated rising economic activity levels. March quarter earnings results were accompanied by generally positive outlook commentary.
The best performing infrastructure sector was Towers (+8%) as investors remained enthusiastic about the long term structural growth drivers underpinning the sector. North American operators were buoyed by a broker upgrade that emphasized the key role these companies would play in the upcoming rollout of 5G networks. Railroads (+7%) also gained strongly. Freight rail stocks rallied as US states began to roll back travel and social distancing restrictions; while Japanese passenger rail gained as the country’s state of emergency was lifted. The worst performing infrastructure sectors were Gas Utilities (+1%) and Multi-Utilities (+3%) as the market favoured higher beta assets.
The best performing infrastructure region was Latin America (+8%). Investors looked past rising coronavirus transmission rates to focus on the region’s longer term growth prospects. Strong gains for towers, railroads and pipelines led the United States (+6%) higher. The worst performing infrastructure region was Asia ex-Japan (-2%) after China proposed a new national security law for Hong Kong, which triggered local protests and international condemnation. The United Kingdom (-1%) also lagged, reflecting muted returns from its defensive utilities sectors, having held up well earlier in the year.
All stock and sector performance data expressed in local currency terms. Source: Bloomberg.
Market Outlook and Strategy
We invests 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.
The portfolio remains positioned with toll roads as its largest sector overweight. Current valuations imply multi-year traffic declines and ignore the reality that interest rates will be lower going forward. There is a valid argument that increased flexibility to work-from-home may result in a permanent adjustment to traffic. There is a stronger argument, and mounting evidence from China, Europe and Australia, that people will prefer to travel by private car than by public transport in order to maintain social distancing.
We have reduced our underweight exposure to the Airports sector but remain cautious. While this month has seen an optimistic share price reaction, any sustained recovery in airline passenger numbers may be slow due to traveller wariness. A staggered re-opening of airports may start with domestic or regional flights, which are less valuable than international flights.
A prudent approach has also been maintained towards North American freight rail stocks, which are relatively sensitive to the economy. Freight volumes are down 20-25%, a level that railroads will not be able to match with cost reductions. The resulting earnings downgrades have yet to be reflected in market expectations.
The portfolio’s long-standing underweight exposure to Multi/ Electric utilities has moved to a small overweight. Many good quality utilities are trading at relatively appealing levels, having underperformed in recent rising markets. Regulated utility earnings should be materially more resilient than those of the broader market in the event of an extended economic slowdown or recession. Lower interest rates will be supportive of valuation multiples. Over the longer term, the structural growth drivers for this sector (build-out of renewables, replacement of aged networks) remain intact.
Source : Company data, First State Investments, as of end of May 2020.
This document is prepared by First State Investments (Singapore) (“FSI”) (Co. Reg No. 196900420D.) whose views and opinions expressed or implied in the document are subject to change without notice. FSI accepts no liability whatsoever for any loss, whether direct or indirect, arising from any use of or reliance on this document. This document is published for general information and general circulation only and does not have any regard to the specific investment objectives, financial situation and particular needs of any specific person who may receive this document. Investors may wish to seek advice from a financial adviser and should read the Prospectus, available from First State Investments (Singapore) or any of our Distributors before deciding to subscribe for the Fund. In the event that the investor chooses not to seek advice from a financial adviser, he should consider carefully whether the Fund in question is suitable for him. Past performance of the Fund or the Manager, and any economic and market trends or forecast, are not indicative of the future or likely performance of the Fund or the Manager. The value of units in the Fund, and any income accruing to the units from the Fund, may fall as well as rise. Investors should note that their investment is exposed to fluctuations in exchange rates if the base currency of the Fund and/or underlying investment is different from the currency of your investment. Units are not available to US persons.
Applications for units of the Fund must be made on the application forms accompanying the prospectus. Investments in unit trusts are not obligations of, deposits in, or guaranteed or insured by First State Investments (Singapore), and are subject to risks, including the possible loss of the principal amount invested.
Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of FSI’s portfolios at a certain point in time, and the holdings may change over time.
In the event of discrepancies between the marketing materials and the Prospectus, the Prospectus shall prevail.
In Singapore, this document is issued by First State Investments (Singapore) whose company registration number is 196900420D. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. First State Investments (registration number 53236800B) is a business division of First State Investments (Singapore). The First State Investments logo is a trademark of the Commonwealth Bank of Australia or an affiliate thereof and is used by First State Investments under licence.
First State Investments (Singapore) is part of the investment management business of First Sentier Investors, which is ultimately owned by Mitsubishi UFJ Financial Group, Inc. (“MUFG”), a global financial group. First Sentier Investors includes a number of entities in different jurisdictions, operating in Australia as First Sentier Investors and as FSI elsewhere.
MUFG and its subsidiaries are not responsible for any statement or information contained in this document. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk, including loss of income and capital invested.