Global Listed Infrastructure Monthly review and outlook

Market review - as at September 2021

Global Listed Infrastructure dipped in September as higher energy prices, US political uncertainty and China’s Evergrande debt crisis weighed on financial markets. The best performing infrastructure sector was Airports (+6%), on US plans to ease pandemic-related restrictions in November for air travellers from 33 countries including China, India, Brazil and most of Europe. Pipelines (+5%) gained on the view that strong energy prices would prove supportive of the growth outlook for these companies.

The worst performing infrastructure sector was Towers / Data Centres (-9%) which were affected by rising bond yields, and as investors took profits following several months of strong performance. Utilities (-4% to -6%) underperformed owing to higher bond yields; a spike in natural gas prices which triggered concerns for rising input costs; and the threat of political interference in European power markets.

The best performing infrastructure region was Japan (+4%), where a coronavirus state of emergency was lifted at the end of the month. The worst performing infrastructure region was the United States (-6%) as its politicians debated raising the country’s debt ceiling, and continued to negotiate President Biden’s infrastructure stimulus initiatives.

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 pick up.

The portfolio is overweight Gas Utilities, which we believe have an important role to play in the years ahead as economies transition to lower carbon energy sources. The portfolio’s holdings in this sector consist of a Chinese operator benefitting from central government support for the country’s transition away from coal; a defensive Japanese gas utility trading at deep value, and specialist US and European names operating from strong strategic positions within niche markets.

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. It remains to be seen how quickly consumer behaviour will return to normal, while business travel may never regain previous levels. 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 September 2021.

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