Global Listed Infrastructure Monthly review and outlook

Global Listed Infrastructure delivered mixed returns in October, despite generally positive earnings numbers. The best performing infrastructure sector was Airports (+10%), which continued to benefit from strong pent-up demand and the lifting of travel restrictions in most markets. The worst performing infrastructure sector was Towers / DCs (-3%) as valuation multiples came under pressure from higher bond yields.  

The best performing infrastructure region was Latin America (+16%), where gains were led by Mexican airport operators and Brazil’s utilities. The worst performing infrastructure region was Asia ex-Japan (-1%), where China reiterated its commitment to a zero-Covid approach.

All stock and sector performance data expressed in local currency terms. Source: Bloomberg.

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 asset class remains positioned to benefit from several long term, structural growth drivers. We remain optimistic about the substantial investment opportunities associated with the decarbonisation of the world’s energy needs. Utilities, which represent about a half of the global listed infrastructure opportunity set, 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. Technology advances and lower costs for utility-scale battery storage will enable renewables to represent a greater share of the overall electricity generation mix. In the medium term, the roll-out of electric vehicles is then expected to provide an additional boost to utilities — first via investment opportunities associated with linking EV charging stations to the grid; and then via higher overall demand for electricity.

Digitalisation is another key long term theme for the asset class. While rising interest rates have weighed on Towers and Data Centres in recent months, structural growth in demand for mobile data (underpinned by the growing reliance on digital connectivity) continues to support steady earnings growth for these stocks. The changes required during the pandemic have accelerated a shift towards the use of wireless data in many people’s everyday lives. The adoption of 5G technology over the medium term will require networks to handle increased data speed, and a much higher number of connected devices.

We also see continued evidence of recovery within the transport infrastructure space. Toll roads represent exceptional value at current levels, with traffic volumes (particularly car traffic) proving resilient. These assets are likely to fare relatively well in a higher inflation environment. Many toll roads have concession agreements that specify how prices can be increased, with an option to follow the inflation rate or an agreed percentage — whichever is higher. Recent earnings results from the Airports sector have highlighted a keen appetite to travel, with the strongest traffic recovery seen at tourism-focused airports such as Spain’s AENA or Mexico’s ASUR. Airlines have also noted that flexible working has given people greater freedom to take short trips.

Source : Company data, First Sentier Investors, as of 31 October 2022.