A monthly review and outlook of the Global Listed Infrastructure sector.
Market review - as at May 2021
Global Listed Infrastructure delivered stable returns in May, consolidating healthy year-to-date gains. The best performing infrastructure sector was Pipelines (+3%), reflecting exceptionally strong March quarter earnings numbers, a disciplined approach to capex spending, undemanding valuation multiples and a higher oil price. The worst performing infrastructure sectors were Electric Utilities (-2%), Multi-utilities (-1%) and Water Utilities (flat) as investors sought higher beta market segments.
The best performing infrastructure region was Latin America (+5%), which was led higher by its transport infrastructure stocks. Asia ex-Japan (+4%) also rose as investor enthusiasm for Chinese gas utilities’ structural growth and government support resulted in strong share price gains. The worst performing infrastructure region was Australia / NZ (-3%). New lockdown measures in the Australian state of Victoria, implemented following a fresh coronavirus outbreak, weighed on the region’s airports and toll road.
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, like barriers to entry and pricing power, which can provide investors with inflation-protected income and strong capital growth over the medium-term.
Toll roads represent the portfolio’s largest sector overweight. We believe these companies represent exceptional value at current levels. Traffic volumes have proved more resilient than those of other transport infrastructure assets; and toll roads are leading a return to normal demand levels as vaccine programs are rolled out. Using Sydney as a case study, data over 2020 and early 2021 has shown that whilst WFH has clearly impacted CBD office occupancy (consistent with anecdotal evidence of 2-3 days in the office and surveys of a desire to spend some time working from home), the impact on toll road traffic is much less pronounced. In fact, on certain roads, traffic is back to pre-pandemic levels.
The portfolio is also overweight Gas Utilities, The portfolio’s holdings in this sector consist of a Chinese operator benefitting from central government support for the transition to cleaner fuels; a Japanese gas utility trading at deep value, and specialist US and European names operating from strong strategic positions within niche markets.
The portfolio has an underweight exposure to Multi / Electric Utilities, as some utilities are traded at levels where limited mispricing is evident. That said, a substantial portion of the portfolio consists of high conviction positions in this space, with a focus on higher quality assets, material scope for capex-related earnings growth, or clear mispricing.
An underweight exposure to the Pipelines sector has been maintained. While the sector has delivered solid gains in recent months, we remain conscious of the structural headwinds that these companies could face as Net Zero initiatives gather pace.
Source : Company data, First Sentier Investors, as of end of May 2021.
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