A monthly review and outlook of the Global Listed Infrastructure sector.
Market review - as at November 2020
Global Listed Infrastructure climbed strongly in November, helped by signs of progress in the fight against coronavirus and optimism regarding Joe Biden’s victory in the US presidential election. The best performing infrastructure sector was Airports (+22%) as investors looked forward to a return to international travel. Pipelines (+15%) also gained, on the view that a coronavirus vaccine will lead to a quicker economic recovery and greater demand for fuel.
The worst performing infrastructure sector was Multi-Utilities (-1%) as investors switched to assets with economic sensitivity. Electric Utilities (+3%) delivered positive returns, but also underperformed rising markets for the same reason. Having performed well when coronavirus was worsening, Towers / Data Centres (+2%) lagged in November.
The best performing infrastructure region was Europe ex-UK (+17%), which was led higher by its airports and toll road operators. Infrastructure stocks in Latin America (+14%) also outperformed on the view that a return to international travel will support developing economies. The worst performing infrastructure region was the United Kingdom (-3%) reflecting its high utilities weighting, and investor caution ahead of the yearend deadline for Brexit trade talks.
All stock and sector performance data expressed in local currency terms. Source: Bloomberg.
Market outlook and portfolio 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.
The listed infrastructure asset class delivered strong increases in November, helping to reduce the losses seen earlier in the year. While changes to share prices have in many cases been substantial, valuations still look reasonable overall. However mispricing in some sectors has now reduced, and portfolio weights have been adjusted to reflect this.
The Portfolio’s exposure to the Airports sector has been reduced. While valuation multiples now reflect positive scenarios over the months ahead, it remains to be seen how quickly consumer behaviour will return to normal. Business travel may never regain previous levels. The decision by Singapore and Hong Kong to delay the launch of an air “travel bubble”, originally scheduled for mid-November but now pushed back to 2021, serves as a reminder of the logistical challenges still facing the sector. An underweight exposure to the Pipelines sector has been maintained, reflecting the structural headwinds that many of these companies face as Net Zero initiatives gather pace.
More positively, we believe Toll roads still represent exceptional value, even after recent gains. Traffic volumes have proved more resilient than those of other transport infrastructure assets, with positive momentum in many regions as the year progressed. While increased flexibility to work-from-home may result in adjustments to traffic, we see clear evidence that people prefer to travel by private car than by public transport in order to maintain social distancing. The portfolio’s exposure to the Towers and Data Centres sector was raised from neutral to overweight, as relative value emerged. The sector’s structural growth drivers of increasing data mobility / connectivity needs in the years ahead remain intact.
The Portfolio has maintained a large absolute exposure to Multi/ Electric utilities. The resilience and predictability of regulated utility earnings – showcased over the past year – does not appear to be fully appreciated by the market. Further, we expect that the ongoing repair and replacement of old equipment and technology, along with the accelerating build-out of renewables, will represent a source of steady earnings growth over long time frames, particularly for larger utilities with substantial economies of scale.
Source : Company data, First Sentier Investors, as of end of November 2020
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