A monthly review and outlook of the Global Listed Infrastructure sector.
Market review - as at November 2021
Global Listed Infrastructure gave up ground in November as news of a potentially more infectious coronavirus variant, and indications that the US Federal Reserve may start to reduce monetary stimulus measures sooner than expected, weighed on financial markets.
The best performing infrastructure sector was Water / Waste (+1%) as investors sought defensive exposure. Toll Roads (+1%) also held up well, with Asia-Pacific operators tending to outperform European peers.
The worst performing infrastructure sector was Pipelines (-6%), on concerns that the Omicron coronavirus variant may hinder the global economic recovery and reduce demand for energy. Airports (-6%) underperformed as strong October passenger volumes were overshadowed by an uncertain outlook for global mobility, as a number of countries tightened travel restrictions.
The best performing infrastructure region was the UK (+7%), reflecting gains from its utility stocks. The worst performing infrastructure region was Canada (-5%) owing to underperformance from its pipelines.
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, via positions in European, Asia Pacific and Latin American operators. We believe these companies represent exceptional value at current levels, with traffic volumes proving significantly more resilient than those of other transport infrastructure assets. While new coronavirus variants have clouded the near term outlook, we remain confident that toll roads will lead a return to normal demand levels as economic activity levels continue to pick up.
The portfolio is also overweight Railroads, primarily via exposure to large cap North American freight rail operators. These firms are unique and valuable franchises. Their wholly-owned track networks are high quality infrastructure assets which can never be replicated. They typically operate under duopoly market conditions, with significant numbers of captive customers such as grain, chemical and auto producers giving them strong pricing power over long haul routes. Improving operating efficiency provides further scope to grow earnings.
The portfolio is underweight Electric / Multi-Utilities. While these companies represent a large segment of the global listed infrastructure universe, and are a good source of yield and defence, some are trading at levels where limited mispricing is evident. That said, a substantial portion of the portfolio still consists of high conviction utility holdings. The portfolio’s focus is on companies with the scope to derive steady, low risk earnings growth from rate base investment (replacing ageing distribution networks, upgrading substations, expanding transmission lines); and the replacement of older coal-fired power stations with wind farms and solar power.
The portfolio is also underweight the Airports sector. The emergence of the Omicron variant has underscored how vulnerable airlines remain to coronavirus-related disruption. The portfolio’s exposure is focused primarily on higher quality European operators such as Spain’s AENA whose passenger mix is tilted towards Leisure and VFR (visiting friends and relatives) travellers. These categories could see numbers rebound sharply as travel restrictions are lifted.
Source : Company data, First Sentier Investors, as of 30 November 2021.
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