Specialist in Asia Pacific, Japan, China, India and South East Asia and Global Emerging Market equities.
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Stewart Investors manage investment portfolios on behalf of our clients over the long term and have held shares in some companies for over 20 years. They launched their first investment strategy in 1988.
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A monthly review and outlook of the Global Listed Infrastructure sector.
Market review - as at April 2021
Global Listed Infrastructure rose in April, supported by generally resilient quarterly earnings numbers and rapid progress in the US vaccination rollout. The best performing infrastructure sector was Towers / Data Centres (+7%), which gained on easing bond yields, positive earnings results and the anticipation of higher growth rates as telecom operators ready themselves to deploy 5G equipment onto tower sites at scale.
The worst performing infrastructure sector was Airports (-1%), owing to ongoing uncertainty about the timeframe for a return to normal travel and economic activity levels. Recent progress on this front includes the opening of a “travel bubble” between Australia and New Zealand; and hopes that the EU may introduce a digital Vaccine Passport in time for the European summer holidays.
Railroads (flat) also underperformed, with passenger rail stocks affected by similar concerns. Sentiment was more bullish in the freight rail space; Canadian National (-9%, not owned) made a US$34 billion counter-bid for Kansas City Southern (+11%, not owned), a 21% premium to the current bid from rival Canadian Pacific (-4%, not owned).
The best performing infrastructure region was the UK (+5%), owing to robust performance from its utility stocks against a backdrop of easing lockdown restrictions. The worst performing infrastructure region was Japan (-7%). The country’s electric utilities fell on concerns for lower electricity sales as new entrants gain market share.
Fund performance
The Fund returned +2.3% after fees in April1 , 11 basis points behind the FTSE Global Core Infrastructure 50/50 TR Index (SGD).
The best performing stock in the portfolio was US regulated utility FirstEnergy (+9%), whose assets include 24,000 miles of transmission network in the Midwest and Mid-Atlantic regions; and electric distribution companies serving customers in Ohio, Pennsylvania, New Jersey, West Virginia, Maryland and New York. Investors welcomed news that investigations into an earlier bribery scandal in its Ohio business were progressing smoothly. The company’s management team also indicated that they may consider selling minority stakes in some of its assets.
Other US utilities with self-help or corporate restructuring themes also performed strongly. NiSource (+9%) announced a US$750 million equity offering, to be spent on the build-out of renewables. The transaction will eliminate the need for further equity raisings between now and 2024, removing a key stock overhang. CenterPoint Energy (+8%) sold its Arkansas and Oklahoma gas utilities to Summit Utilities (owned by JP Morgan Infrastructure) for a greater-than-expected price of US$1.7 billion.
Pipelines’ earnings results revealed the silver lining to February’s Texas storms. Although some assets suffered from power outages, this was more than offset by the ability to redirect natural gas, NGLs and refined product volumes, and sell them for unusually high prices. This factor contributed to better-than-expected March quarter earnings for Magellan Midstream Partners (+8%). Enterprise Products Partners (+8%) gained on the view that its well-diversified and highly integrated asset footprint was also likely to have benefitted.
Tower operators SBA Communications (+8%) and American Tower (+7%) reported strong leasing activity and tower services workflows — both of which are positive leading indicators for revenue growth. This comes after a period of relative subdued activity, as carriers (the towers’ customers) begin to deploy their newly acquired spectrum to serve 5G.
The worst performing stock in the portfolio was China Gas (-12%), which carried out a US$1.5 billion capital raising. The proceeds will be used to acquire city gas projects, and to expand and develop its liquefied petroleum gas and distribution heating businesses. A lack of specific details about how the funds would be deployed saw investors take a cautious approach. However, strong policy support for the transition away from coal towards cleaner energy sources means that the company should continue to benefit from structural growth in China’s demand for natural gas. Tokyo Gas (-10%), which serves industrial, commercial, residential customers in the Greater Tokyo Area, lagged after announcing lower-than-expected earnings guidance for the year ahead. Increasingly rigorous competition to its city gas distribution business is expected to affect sales volumes.
The portfolio’s toll roads delivered mixed returns. Developed Market roads performed well. France’s Vinci (+7%) announced strong March quarter earnings and agreed to acquire the Industrial Services division of Spain’s ACS (-4%, not part of our Focus List), giving it a foothold in the global renewable energy sector. Eiffage (+7%) was buoyed by its peer’s strong operating performance. Australia’s Transurban (+6%) gained as traffic volumes on its Australian and North American road networks during the first quarter tracked broadly in line with expectations. However CCR (-6%), Brazil’s largest toll road operator, which also runs airport and subway concessions, lagged as concerns about the worsening coronavirus situation overshadowed its longer term potential to participate in Brazil’s large scale and much needed infrastructure investment opportunities.
Annualised performance in SGD (%) 2
Cumulative performance in SGD (%) 2
Asset allocation (%) 2
Top 10 holdings (%) 2
1 First Sentier Global Listed Infrastructure Fund’s cumulative return over one month. The performance of the fund is based on the Singapore unit trust, net of fees, expressed in SGD terms.
2 Source: Lipper & First Sentier Investors. Single pricing basis with net income reinvested. Data as at 30 April 2021. Allocation percentage is rounded to the nearest one decimal place and the total allocation percentage may not add up to 100%. First Sentier Global Listed Infrastructure Fund inception date: 3 March 2008.
* From inception - 31 May 08 : S&P Global Infrastructure Index; From 1 Jun 08 – 31 Mar 15 : UBS Global Infrastructure and Utilities 50-50 Index; From 1 Apr 15 : FTSE Global Core Infrastructure 50/50 Index.
All stock and sector performance data expressed in local currency terms. Source: Bloomberg.
Fund activity
The Fund divested its holding in East Japan Railway after a more positive outlook for passenger numbers since the start of the year drove significant share price gains and reduced the stock’s mispricing.
Market outlook and fund positioning
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 outlook for the asset class is positive. Government attempts to bolster economic fundamentals through infrastructure and green energy stimulus plans — including Biden’s infrastructure plan — are likely to benefit many global listed infrastructure firms. In particular, the ongoing repair and replacement of old energy transmission and distribution grids, along with the accelerating build-out of renewables, should represent a steady source of utility earnings growth over many years. The resilience, predictability and growth potential of these earnings — showcased over the past year — do not appear to be fully reflected in current valuation multiples.
There is also scope for a material recovery in traffic / passenger volumes across coronavirus-impacted infrastructure sectors such as toll roads, airports and passenger rail, as vaccine programs ramp up globally. Reflecting this, toll roads represent the portfolio’s largest sector overweight. We believe these companies represent exceptional value at current levels. Traffic volumes have proved more resilient than those of other transport infrastructure assets; and toll roads are likely to be the first to see a return to normal demand levels.
Rising interest rate risk now appears to have been priced into Towers’ valuations. Ever-increasing demand for mobile data / connectivity needs continues to underpin steady earnings growth for these companies, insulating them from the ebbs and flows of the broader global economy.
More broadly, we also note that financial market pessimism towards global listed infrastructure and optimism towards higher risk assets over the past 12 months has driven an increase in intrinsic value across the asset class. This bodes well for future global listed infrastructure performance.
Source : Company data, First Sentier Investors, as of end of April 2021.
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