Global Listed Infrastructure Monthly review and outlook

Global Listed Infrastructure declined in May on investor concerns that inflation, and therefore interest rates, may remain elevated for longer than previously hoped.

The best performing infrastructure sectors were Railroads (flat) and Other (+1%). Railroads held up thanks to steady returns from Japanese passenger rail, while North American freight rail stocks were supported by attractive valuations and the view that recent volume declines may soon reach a floor. The ports, satellites and merchant power operators that make up the Other sector were buoyed by gains for Emerging Markets port stocks.

The worst performing infrastructure sector was Towers / Data Centres (-9%), as concerns for interest rate levels and future leasing demand continued to weigh on tower stocks. During the month both the US Federal Reserve and European Central Bank raised interest rates by 0.25%. 

The best performing infrastructure region was Japan (+5%), whose electric Utilities were buoyed by government approval to raise power prices. The worst performing infrastructure region was the United States (-6%), reflecting underperformance from its Tower / DCs, Energy Midstream and Utility / Renewables stocks.

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.

In the communications infrastructure space, structural growth in demand for data continues to support earnings growth in the towers space. Concerns for higher interest rates are now better reflected in valuation multiples. Data centres are positioned to benefit from growing demand for cloud computing, driven in part by the recent surge in AI interest.

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 May 2023.