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formerly Realindex Investments
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A monthly review and outlook of the Global Listed Infrastructure sector.
Market review - as at August 2024
Global Listed Infrastructure gained in August, supported by robust fundamentals and anticipated interest rate cuts. The best performing infrastructure sector was Energy Midstream (+6%), following a pleasing set of June quarter earnings. Rising US demand for energy and a keen appetite for US Liquefied Natural Gas exports from customers in Europe and Asia appear set to continue to support favourable operating conditions for the sector.
Utilities / Renewables (+4%) were supported by mounting expectations that the US Federal Reserve may cut interest rates in September; growing awareness that demand for electricity is likely to rise over coming years; and concerns for slowing economic growth resulting in increased appetite for these defensive assets.
The worst performing infrastructure sector was Railroads (flat) as union disputes weighed on Canadian freight rail operators Canadian National (-1%, not held) and Canadian Pacific (-4%, not held). Japanese passenger rail stocks were affected by volatility in the broader Japanese market at the start of the month.
The best performing infrastructure region was Latin America (+4%), whose airports and toll roads gained on positive regulatory developments and hopes of lower interest rates respectively. The worst performing infrastructure region was the UK (flat), which paused for breath following healthy gains in recent months for several of its utility stocks.
Market outlook and Strategy
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 remain the portfolio’s largest sector overweight. These stocks have benefited from a shift towards cars and away from public transport since the COVID-19 pandemic. To date, inflation-linked toll increases have had little impact on demand. High operating leverage (i.e. largely fixed costs as sales increase) has proved supportive of earnings growth. Improvements made to toll road networks in recent years provide scope for further growth in traffic volumes.
A substantial portion of the portfolio consists of utilities / renewables. The shift from coal generation to wind, solar and storage, supported in the US by the Inflation Reduction Act; along with the need for increased resiliency spend, should drive meaningful capital expenditure growth for this sector. Increased capex should in turn drive higher rate base and earnings growth for regulated utilities. This theme is being amplified by growth in data centres / AI, industrial onshoring and electric vehicles, which are driving a steady increase in demand for electricity — the first time in decades that this has been seen in many developed markets.
The portfolio remains underweight energy midstream. Within this space, we prefer US-listed operators servicing low-cost basins; or that are positioned to benefit from growth in US exports. An elevated oil price, robust US LNG export levels and a disciplined approach to capital expenditure are enabling these companies to generate strong free cash flows.
Source : Company data, First Sentier Investors, as of 31 August 2024.
Global Listed Infrastructure
Infrastructure powers the world we live in – and when it comes to on-the-ground research, our team can be found on site
Investing in global listed infrastructure can offer inflation-protected income and steady capital growth from real assets delivering essential services. We search for best-in-class assets worldwide with high barriers to entry, structural growth and pricing power.
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