Global Listed Infrastructure Monthly review and outlook

Global Listed Infrastructure fell in September. Concerns that central banks may need to raise interest rates further than previously anticipated, in order to curb inflation, caused widespread turbulence throughout financial markets. The best performing infrastructure sectors included Airports (-7%), as generally healthy passenger volumes provided evidence that global travel conditions were continuing to normalise. The ports, satellites and merchant power operators included within the Other (-7%) sector also fared relatively well. The worst performing infrastructure sector was the bond yield sensitive Towers / Data Centres (-15%). During the month the US 10-year bond yield rose from 3.2% to 3.8% - its highest level in over a decade.

The best performing infrastructure region was Japan (-5%); the country’s passenger rail stocks gained as travel restrictions for tourists visiting the country were eased. The worst performing infrastructure region was the United Kingdom (-14%), where the government’s announcement of a large debt-financed package of tax cuts triggered a sharp market reaction.

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.

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 (particularly car traffic) likely to prove resilient if economic conditions deteriorate. Toll roads are also 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. 

The portfolio is also overweight Utilities / Renewables. The Portfolio’s focus is on companies with the scope to derive steady, low risk earnings growth by replacing old fossil fuel power plants with renewables, 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 an ever-greater share of the overall electricity generation mix. In the medium term, the roll-out of electric vehicles is 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.

The Inflation Reduction Act (IRA), which includes a broad range of proposals in support of renewables and low carbon energy sources and was signed into law in August, represents a material tailwind for these themes within the US. During our company meetings this month, US utility management teams made strongly positive comments about the IRA, noting the extent to which it reduces the cost of new solar and wind build-out and supports investment in this area.

The portfolio is underweight Towers / DCs. We still expect the sector to be a beneficiary of structural growth in demand for mobile data, and for earnings to prove relatively resilient in the event of a slowing economy. However, further interest rate rises could represent a headwind to valuation multiples in the near term, and to interest expense in the medium term. Underweight exposure to the Energy Midstream sector has been maintained. Strong gains across the sector have moved these stocks to lower rankings within our investment process; and we remain conscious of the structural headwinds that Net Zero initiatives may present to these stocks.

Source : Company data, First Sentier Investors, as of 30 September 2022.