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A monthly review and outlook of the Global Listed Infrastructure sector.
Market review - as at May 2024
Global Listed Infrastructure rose in May as structural growth themes proved supportive. The best performing infrastructure sector was Towers / Data Centres (+11%) aided by easing bond yields (towers) and a positive demand outlook for data storage (DCs). Utilities / Renewables (+7%) increased on the growing view that the sector was well positioned to benefit from a growing need for electricity, particularly from carbon-free sources.
The worst performing infrastructure sector was Railroads (flat), which paused against a backdrop of lacklustre North American freight haulage volumes.
The best performing infrastructure region was Japan (+8%), led by strong gains for the country’s electric utilities.
The worst performing infrastructure region was the UK (-3%), reflecting the impact of a substantial capital raising carried out by large-cap electric utility National Grid. The announcement of an earlier-than-expected general election raised renewed concerns around political risk for the country’s water utilities.
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.
Earnings growth for the asset class is likely to be underpinned by a number of structural growth themes over coming years. We are optimistic about the substantial investment opportunities associated with the decarbonisation of the world’s energy needs. Utilities 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.
In addition to the energy transition, electricity demand levels in North America are also set to increase in absolute terms, after years of maintaining roughly consistent levels. This should provide a further tailwind for the earnings of many regulated US utility stocks. It is also likely to bolster the need for transition fuels such as natural gas, which have a crucial role to play in maintaining energy reliability and affordability. As well as benefitting utilities, this is also likely to drive additional demand for North American energy midstream storage and transportation assets.
Digitalisation is another key theme for the asset class. We expect structural growth in demand for mobile data (underpinned by an ever-growing reliance on digital connectivity) to support long-term earnings growth for Towers. The adoption of 5G technology over coming years will require networks to handle increased data speed, as well as a much higher number of connected devices. The surge of interest in AI is driving data center demand, as well as boosting the need for electricity.
Source : Company data, First Sentier Investors, as of 31 May 2024.
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