A monthly review and outlook of the Global Listed Infrastructure sector.
Market review - as at December 2020
Global Listed Infrastructure ended the year on a mixed note. Surging coronavirus case numbers tempered vaccine hopes and the prospect of a more substantial US stimulus package. The best performing infrastructure sector was Railroads (+3%), as Japanese bullet train operators gained on appealing valuations and optimism for future passenger rail volumes. Airports (+2%) also rose on hopes that a coronavirus vaccine rollout would enable the start of a return to normality for the sector.
The worst performing infrastructure sector was Towers / Data Centres (-3%), on the view that higher-than-expected prices at the latest 5G spectrum auction could leave telecom companies with less capital for network investment. Pipelines (-2%) also lagged after a very strong November.
The best performing infrastructure region was Latin America (+6%), as Brazil’s utilities and Mexican airports continued to gain on hopes for a recovery from 2020’s coronavirus-related economic downturn. The worst performing infrastructure region was Australia / NZ (-2%), owing to mounting trade tensions between Australia and China; and a fresh coronavirus outbreak in New South Wales.
The Fund returned -1.8% after fees in December1 , 186 basis points behind the FTSE Global Core Infrastructure 50/50 TR Index (SGD).
The best performing stock in the portfolio was US regulated electric utility FirstEnergy (+15%), which rallied on the view that the market had over-reacted to July’s news of a corruption case involving nuclear plant subsidies. The company’s sale of competitive power generation assets in recent years to focus on its regulated transmission and distribution utility businesses has resulted in a more predictable earnings profile, giving scope for its valuation multiples to expand further from current levels.
Other strong performers in the US electric utility space included NextEra Energy (+5%) on continued market enthusiasm for the green energy transition; and Exelon (+3%), which sold its portfolio of solar assets for US$810 million. The price equates to US$2,250 per kilowatt (KW) of generation capacity, compared to our modelled valuation of US$1,500/KW for these assets. Positively, the move also signals that Exelon is progressing along the path of separating its substantial portfolio of generation assets from its regulated utilities.
Japanese passenger rail holdings West Japan Railway (+13%) and East Japan Railway (+6%) increased on mounting hopes for a passenger recovery in 2021 once coronavirus vaccines are rolled out across Japan. The portfolio’s airport operators ASUR (+9%), AENA (+4%) and Flughafen Zurich (+1%) also gained on the view that passenger numbers could increase over the course of the next year.
UK electric utility SSE (+12%) continued its strong run, reflecting a growing recognition of the substantial wind power investment opportunities available to this firm. A broadly positive Final Determination for RIIO-2 (the regulated price framework that will apply to the country’s gas and electricity transmission utilities for the next five years) provided an additional tailwind to its share price.
Regulatory decisions also supported Chinese water utility Guangdong Investment (+8%), which rallied after the announcement of favourable terms for its water sales to Hong Kong over the next three years. The same mechanism will also apply for the following two three-year periods, giving the company a total of nine years of regulatory certainty. Gas utility China Gas (+8%) rose after reporting a strong set of interim earnings results at the end of November.
The worst performing stock in the portfolio was Western Canadian pipeline operator Pembina Pipeline (-8%). Concerns for the structural headwinds facing fossil fuel-related businesses overshadowed the announcement of in-line earnings guidance for 2021. The company’s prudent approach to capital management offers scope to reduce debt or buy back shares.
An underwhelming response to the IPO of Dalrymple Bay Infrastructure (not in our Focus List) which handles around a third of Queensland’s coal exports, weighed on sentiment towards Australian freight rail operator Aurizon (-8%). US multi-utility CenterPoint Energy (-7%) also lagged as it continued to seek a buyer for its stake in the Enable Midstream Partners pipeline business.
Following sharp gains in November, European toll road operators Vinci (-5%), Eiffage (-4%) and Atlantia (-4%) underperformed as higher coronavirus case numbers in Europe and the return of increasingly strict lockdown measures led to concerns for lower traffic volumes.
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 31 December 2020. 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.
The Fund sold its position in Mexican pipeline company IEnova after US multi-utility Sempra Energy (+1%, not owned) announced it would acquire the outstanding shares.
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. Interest rates appear set to remain at low levels for a sustained period of time, which should prove supportive of defensive and interest-rate sensitive sectors such as utilities and towers.
Government attempts to improve weak economic fundamentals through infrastructure and green energy stimulus plans are also 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 long time frames.
A slow or uneven economic recovery would also favour structural themes – such as investment in mobile phone networks to support ever-increasing demand for mobile data - over cyclical growth opportunities.
Further, while the timing remains hard to predict, there is also scope for gradual recovery in traffic / passenger volumes for coronavirus-impacted infrastructure sectors such as toll roads, airports and passenger rail, as vaccines are delivered.
In addition, financial market pessimism towards global listed infrastructure over the past year - and optimism towards higher risk assets – has driven an increase in intrinsic value opportunities across the asset class, which bodes well for global listed infrastructure performance in 2021.
Source : Company data, First Sentier Investors, as of end of December 2020
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