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 2024
Global Listed Infrastructure held up relatively well in April as robust earnings results enabled the asset class to shrug off renewed concerns for rising interest rates.
The best performing infrastructure sector was Airports (+2%), as positive March quarter earnings propelled Mexican airport operators sharply higher. Utilities / Renewables (+2%) gained on the back of strong earnings; and on an increasingly favourable outlook for power demand.
The worst performing infrastructure sector was Towers / DCs (-11%) as persistently high inflation rekindled interest rate concerns. Tower companies typically have fixed escalators built into their contracts with clients, but less ability to pass through higher interest costs.
The best performing infrastructure region was Latin America (+4%), owing to strong gains for Mexico’s airports. The worst performing infrastructure region was Australia / NZ (-5%), which was held back by lacklustre returns from the region’s transport infrastructure stocks.
Fund performance
The Fund returned +1.0% after fees in April1 , 129 basis points ahead of the FTSE Global Core Infrastructure 50/50 TR Index (SGD).
The best performing stock in the portfolio was Guangdong Investment (+22%), as investors identified value. Guangdong is a Chinese water utility with property rental and development businesses, along with small investments in toll roads and electricity generation. The stock rose after reporting satisfactory March quarter earnings results, with steady earnings growth for its core water business and reasonable performance from its property segments. Chinese gas utility ENN Energy (+12%) and Beijing Airport (+5%) performed well during the month, on the back of modest valuation multiples. Indications of improving manufacturing activity levels also buoyed investor sentiment towards China.
Mexican airport operators GAP (+17%) and ASUR (+12%) rose strongly after announcing better-than-expected March quarter earnings. Passenger volumes for both companies were broadly flat, with strong international passenger growth offset by softness in domestic passenger numbers. However investors welcomed strong growth in commercial revenues (i.e. duty free and car parking) for GAP; while ASUR’s results were supported by an increase in the amounts it is allowed to charge for passenger fees and a range of other tariffs.
US-listed electric utility and renewables leader NextEra Energy (+5%) announced above-consensus March quarter earnings, driven by healthy rate base growth for its regulated Florida utility business; and provided positive commentary around its renewables development pipeline. Virginia-based regulated utility Dominion Energy (+4%) continued its strong recent run. The high number of existing data centres in its service territory, along with others in the planning or construction stages, are expected to add to add to load growth in coming years. Potential projects for the company include a proposed 2.6 gigawatt wind farm off the Virginia coast which, once built, will be the largest US offshore wind farm. These firms are amongst a number of utility stocks held by the portfolio that appear well-positioned to benefit from increase in power demand across the US.
The worst performing stocks in the portfolio were US-listed tower companies American Tower (-12%) and Crown Castle (-11%), as interest rate expectations remained a key driver of share price performance for this bond yield sensitive sector. At the very end of the month, American Tower announced healthy March quarter earnings, with steady performance from its US towers business and pleasing contributions from its data centre and international towers segments. The company also upgraded its 2024 earnings guidance.
Toll roads were another area of weakness during the month. In the absence of material stock-specific news, rising bond yields appear to have been the biggest headwind for Brazilian toll road operator CCR (-9%) and Australian peer Transurban (-6%). French-listed infrastructure construction and concessions business Vinci (-4%), whose assets include substantial toll road and airport businesses, gave up ground as investors digested news of its ~£1.3 billion acquisition of a majority stake in Edinburgh Airport from unlisted infrastructure manager GIP. While the price paid looks full on current multiples, Vinci has a good track record of realising value from its airport assets over time, for example by increasing tariffs and improving retail offerings.
US east coast freight rail operator Norfolk Southern (-10%) lagged as investor hopes for activist-driven changes faded over the course of the month. This month’s share price fall appears to reflect the view that the company may have conceded to enough of activist investor Ancora Capital’s demands to enable the existing management team to stay in place; rather than appointing a new management team mandated to carry out a more ambitious program of improvements.
1 Fund performance is based on the Singapore unit trust, net of fees, expressed in SGD terms.
All stock and sector performance data expressed in local currency terms. Source: Bloomberg.
Fund activity
No new stocks were added to the portfolio during the month, and positions in existing holdings were generally maintained at current weights.
Market outlook and fund positioning
The Fund 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, via positions in seven companies with operations in ten countries. Toll roads 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. Strong 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. Electricity demand has remained roughly flat in many developed markets for many years. However, growth in data centres, industrial on-shoring and electric vehicles is expected to lead to a steady increase in demand in the years ahead. The shift from coal generation to wind, solar and storage, supported in the US by the Inflation Reduction Act, and the need for increased resiliency spend, should also support meaningful capital expenditure growth. Increased capex should in turn drive higher rate base and earnings growth for regulated utilities.
The portfolio remains underweight energy midstream. A supportive oil price, robust LNG export levels and a disciplined approach to capital expenditure are enabling the sector to generate strong free cash flow. However, following a sustained period of strong performance, mispricing in this sector has become less evident. We have maintained high conviction positions in companies operating in low cost basins; or that are positioned to benefit from growth in US LNG exports.
Source : Company data, First Sentier Investors, as of 30 April 2024.
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