Global Listed Infrastructure Monthly review and outlook

Global Listed Infrastructure rose strongly in July, reflecting a rotation away from higher beta market sectors including technology, in favour of more defensive assets.

The best performing infrastructure sector was Towers / Data Centres (+12%), supported by healthy earnings numbers and easing interest rates. The US 10-year Treasury yield fell from 4.4% to 4.0% during the month. A positive update from telecommunications / networking company Ericsson (+11%, not in our Focus List), which reported improving demand for its network equipment in North America, also buoyed sentiment towards Towers.

The worst performing infrastructure sector was Airports (flat). Several airlines indicated that demand for air travel may now be softening, following the post-Covid phenomenon of “revenge travel”. Spain’s largest airport operator AENA (-7%, not held) fell on concerns that Barcelona Airport, a key asset, may be separated from the company as moves to provide greater autonomy to the Catalonian region progressed.

The best performing infrastructure region was the UK (+10%). The country’s water and electric utilities gained against a backdrop of greater political certainty, following a convincing victory for the Labour Party in the country’s general election. Ofwat, the water regulator for England and Wales, released Draft Determinations setting out its provisional assessment of allowed revenues and performance targets for water utilities between 2025 and 2030. Listed water utilities including Pennon (+13%, not held), Severn Trent (+8%, held) and United Utilities (+5%, not held) increased as investors welcomed the proposals.

The worst performing infrastructure region was Japan (-3%) as the country’s electric utilities (not in our Focus List) gave up ground following gains earlier in the year.

The Fund returned +4.8% after fees in July¹ , 28 basis points behind the FTSE Global Core Infrastructure 50/50 TR Index (SGD).

The best performing stock in the portfolio was US freight rail operator Norfolk Southern (+16%), which announced better-than-expected June quarter earnings, aided by disciplined cost control. Investors welcomed better service metrics such as train speed and dwell time (the time spent at a scheduled stop without moving). These developments indicate that the company is working to address recent criticisms made by activist investor Ancora Holdings, highlighting that Norfolk Southern lagged peers on a range of operational efficiency metrics. West coast peer Union Pacific (+9%) also increased as the company’s Operating Ratio, a key measure of operational efficiency, reached its best level since 2022. The company’s June quarter earnings were in line with market expectations.

Regulated US utilities represented another area of strength for the portfolio. Eversource Energy (+14%), which serves 4.4 million customers in Connecticut, Massachusetts and New Hampshire, was supported by attractive valuation multiples; indications of an improving regulatory environment for its Connecticut operations; and the prospect of further interest rate declines. Several peers were supported by evidence of rising demand for electricity. On its June quarter earnings call, American Electric Power (+12%) noted that demand for electricity within its Commercial segment increased by 12% compared to the same period a year earlier, driven primarily by robust demand from data centre customers. Peers including Alliant Energy (+10%), Evergy (+9%) and Xcel Energy (+9%) also gained on optimism around this long term, structural theme. NextEra Energy (+8%), whose businesses include regulated Florida utilities as well as renewables developer NextEra Energy Resources, reported strong growth in its pipeline of future renewables projects. The company announced 3 GW (gigawatts) of additional wind / solar / storage projects for the June quarter – substantially higher than its typical quarterly increase of 2 GW.

US mobile tower operators gained as bond yields eased. American Tower (+13%) announced US$2.9 billion revenue for the June quarter, 4.6% better than the same period a year earlier and slightly ahead of market consensus. The company largely reiterated its organic revenue growth forecasts and noted that its data centre operations were seeing robust demand. Quarterly earnings for peer Crown Castle (+13%) were in line with expectations; and the company confirmed its 2024 earnings guidance. A strategic review of the company’s fibre-cable business remains in progress.

The worst-performing stock in the portfolio was Chinese gas utility ENN Energy (-15%), as concerns re-emerged that the sluggish pace of Chinese economic growth would affect customer demand for natural gas. Similar worries weighed on the share price of Chinese water utility Guangdong Investment (-10%), which manages property, toll road and electricity generation assets alongside its core business of supplying water to Hong Kong.

The portfolio’s airport holdings also underperformed during an otherwise strong month for the asset class. Japan Airport Terminal (flat) and Beijing Airport (flat) delivered neutral returns for the month in the absence of material stock-specific news. Mexican operator ASUR (+2%) announced robust June quarter earnings, aided by positive trends in its commercial segment (i.e. car rental and parking), but saw relatively modest gains. Swiss peer Flughafen Zurich (+2%) also edged higher, building on pleasing share price gains since the start of the calendar year.

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.

Early in the month, a position in Chinese toll road operator Jiangsu Expressway was divested after a period of strong share price performance relative to other global toll road operators reduced mispricing and moved the stock lower within our investment process. 

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.

Since early 2022, with rising interest rates a key concern for investors, global listed infrastructure has underperformed broader equity markets and delivered roughly flat returns. A backdrop of “risk-on” sentiment has seen higher growth areas of the market, particularly technology, outshine lower beta assets. Political uncertainty - always a key risk for infrastructure investors - has also been front of mind, with a large proportion of the world’s population eligible to vote in an election during 2024.

However, the headwinds that have faced global listed infrastructure over this period may now be about to turn into tailwinds. In recent weeks central banks in Canada and the UK have cut interest rates, and bond yields have fallen sharply. Concerns that the global economy may be starting to slow appears to be drawing investors back towards more defensive assets, including global listed infrastructure. Political uncertainty has reduced following significant recent elections in India, Mexico, France and the UK, albeit with the US presidential election still to come.

Listed infrastructure’s regulated or contracted earnings should prove supportive in the event of a deteriorating economic environment. We also remain optimistic about the structural growth themes that the asset class is positioned to benefit from, including the energy transition (utilities), digital connectivity (towers), growth in AI (data centers) and rising demand for electricity (utilities, energy midstream).