A monthly review and outlook of the Global Listed Infrastructure sector.
Market review - as at September 2020
Global Listed Infrastructure held up in September as global equities’ recent momentum faltered. The best performing infrastructure sectors included Multi-Utilities (+2%) and Electric Utilities (+1%) as investors rotated towards stable, lower beta assets. Toll Roads (+2%) also gained, helped by improving traffic volumes for Asia-Pacific operators.
The worst performing infrastructure sector was Pipelines (-7%), which lagged on a growing awareness of the longer term structural challenges facing fossil fuel demand (decarbonisation and renewables growth, electric vehicles rollout, potential competition from hydrogen). During the month, California’s Governor signed an order that would prohibit the sale of diesel and petrol passenger cars in the state by 2035; and China committed to a 2060 net zero carbon emissions target.
The best performing infrastructure regions were the United Kingdom (+4%), where utilities were buoyed by the prospect of more favourable regulatory outcomes than previously anticipated; and Australia / New Zealand (+4%), whose roads and airports gained on an improving coronavirus situation. The worst performing infrastructure region was Latin America (-4%), reflecting underperformance from Brazil’s broader market.
All stock and sector performance data expressed in local currency terms. Source: Bloomberg.
Market outlook and strategy
The Fund 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 portfolio remains positioned with toll roads as its largest sector overweight. Valuation multiples still imply multi-year traffic declines, in contrast to the improvements that toll road companies referenced in recent quarterly earnings updates. 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 overweight exposure to gas utilities consists of specialist North American and European companies operating in niche market areas; a Japanese operator with a strong balance sheet trading at undemanding valuation multiples; and Chinese gas utilities which are positioned to benefit from a structural shift from coal to cleaner energy sources, in a region that has so far coped well with the coronavirus outbreak.
The Fund now has a roughly neutral exposure to Multi/Electric utilities, where steady share price gains have reduced some of the mispricing previously seen in this sector. Utilities still represent a substantial part of the portfolio in absolute terms. Regulated utility earnings should be materially more resilient than those of the broader market in the event of an extended economic slowdown or recession; and low interest rates will be supportive of valuation multiples.
We remain cautious on the Airports sector. A sustained recovery in airline passenger numbers appears a remote prospect for many airports, given traveller wariness and persistently high coronavirus case numbers. A staggered re-opening of airports appears likely to start with domestic or regional flights, which are less valuable than international flights. The silver lining is that many airports’ regulated assets are now under-earning their allowed returns, giving scope for future regulatory terms to be more generous than previously expected.
Source : Company data, First Sentier Investors, as of end of September 2020
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