Specialist in Asia Pacific, 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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Global Listed Infrastructure Monthly review and outlook

Global Listed Infrastructure Monthly review and outlook

A monthly review and outlook of the Global Listed Infrastructure sector.

Market review - as at May 2024

Global Listed Infrastructure rose in May as structural growth themes proved supportive. The best performing infrastructure sector was Towers / Data Centres (+11%) aided by easing bond yields (towers) and a positive demand outlook for data storage (DCs). Utilities / Renewables (+7%) increased on the growing view that the sector was well positioned to benefit from a growing need for electricity, particularly from carbon-free sources.

The worst performing infrastructure sector was Railroads (flat), which paused against a backdrop of lacklustre North American freight haulage volumes. 

The best performing infrastructure region was Japan (+8%), led by strong gains for the country’s electric utilities. 

The worst performing infrastructure region was the UK (-3%), reflecting the impact of a substantial capital raising carried out by large-cap electric utility National Grid. The announcement of an earlier-than-expected general election raised renewed concerns around political risk for the country’s water utilities.

Fund performance

The Fund returned +1.6% after fees in May1 , 248 basis points behind the FTSE Global Core Infrastructure 50/50 TR Index (SGD). 

The best performing stock in the portfolio was large-cap US utility and leading renewables developer NextEra Energy (+19%). This substantial gain reflected a growing investor awareness of the increasing demand for power generation that many US utilities are currently facing, driven by data centres and the growth of AI (which typically consumes more energy than other data centre customer types). Demand is particularly keen for carbon free energy sources. As the largest renewables developer in the US, NextEra Energy appears particularly well placed to benefit. Southern Company (+10%) and Dominion Energy (+7%) were amongst a number of other US utility stocks that rose during the month, on the view that they were also likely to fare well in this environment. Both companies announced better-than-expected March quarter earnings, aided in part by healthy demand for electricity.

Mobile tower companies American Tower (+14%) and Crown Castle (+9%) increased as interest rates receded from recent highs. Crown Castle owns ~40,000 US macro towers, ~115,000 small cell antenna systems (either on-air or under contract) and 90,000 route miles of fibre optic cabling. The company is currently carrying out a strategic review of its fibre business. The sale of these assets, for a reasonable price, could represent a positive catalyst for its stock price.

The portfolio’s Chinese infrastructure stocks — water utility Guangdong Investment (+8%), airport operator Beijing Airport (+6%), gas utility ENN Energy (+6%) and toll road operator Jiangsu Expressway (+6%) — built on April’s strong gains. In the absence of material stock-specific news, these moves appear to have been primarily driven by optimism around government support measures for China’s property market.

The worst performing stock in the portfolio was Brazil toll road operator CCR (-2%). The company announced resilient March quarter earnings numbers featuring strong operational performance from its toll road division, but lagged in sympathy with the broader Brazil stock market. Mexican airport operator ASUR (-1%) gave up ground as investors took profits following a series of strong gains in recent months.

US freight rail operators Norfolk Southern (-2%) and Union Pacific (-1%) also underperformed. Sentiment towards Norfolk Southern appears to have been affected by concerns around the pace at which it will improve its operating metrics, having largely rebuffed the approach of activist investor Ancora Holdings. Recent downbeat comments from Union Pacific’s management team on the pricing environment may have weighed on its share price. 


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

The Fund initiated a position in large-cap UK utility National Grid after the company’s recent £7 billion capital raising removed a key overhang from the stock. Britain’s largest electricity transmission and distribution business, National Grid plans to invest around £60 billion across the next five years to modernise and expand the country’s electricity grid as the economy decarbonises. Under its regulatory framework, the company will recoup (and earn a reasonable return) on the money it invests into these substantial projects.

The Fund also bought shares in US-listed electric utility AES Corp, which owns and operates a geographically-diversified portfolio of energy generation assets. The company is seeking to divest non-core assets and focus on the build-out of renewables in the US. This strategy is likely to enable the company to benefit from the increasing demand for energy that is being driven by data centres and AI, industrial onshoring and EV charging.

The Fund added Japanese airport operator Japan Airport Terminal, owner and operator of the terminals at Japan’s Haneda Airport in Tokyo. Earnings are derived from passenger processing charges and retail activities within the terminals. Following a sustained period of underperformance vs the broader Japanese market, the company is trading at appealing valuation multiples. It appears well-positioned to benefit from an expected increase in inbound tourism, aided by the weak yen making Japan an attractive destination for overseas travellers, and the expected recovery in Chinese inbound tourists.

The Fund also bought shares in GFL Environmental, the fourth-largest North American waste management company with operations in every Canadian province and in 24 US states. Despite strong earnings growth since listing in 2020, the company currently trades at a discount to peers on concerns around its current borrowing levels. From here, disciplined balance sheet management and favourable operation conditions for the waste management sector give the stock scope to close the valuation gap that currently exists between it and peers.

A holding in Spanish airport operator AENA was sold after strong share price gains since initiating the position in June 2020 reduced mispricing; and on the view that a positive outlook for traffic volumes during the European summer holiday season is already reflected in valuation multiples.

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.

Earnings growth for the asset class is likely to be underpinned by a number of structural growth themes over coming years. We are optimistic about the substantial investment opportunities associated with the decarbonisation of the world’s energy needs. Utilities are positioned to derive steady, regulated earnings growth by building solar and wind farms, and by upgrading and expanding the networks needed to connect these new power sources to the end user.

In addition to the energy transition, electricity demand levels in North America are also set to increase in absolute terms, after years of maintaining roughly consistent levels. This should provide a further tailwind for the earnings of many regulated US utility stocks. It is also likely to bolster the need for transition fuels such as natural gas, which have a crucial role to play in maintaining energy reliability and affordability. As well as benefitting utilities, this is also likely to drive additional demand for North American energy midstream storage and transportation assets.

Digitalisation is another key theme for the asset class. We expect structural growth in demand for mobile data (underpinned by an ever-growing reliance on digital connectivity) to support long-term earnings growth for Towers. The adoption of 5G technology over coming years will require networks to handle increased data speed, as well as a much higher number of connected devices. The surge of interest in AI is driving data center demand, as well as boosting the need for electricity.

Source : Company data, First Sentier Investors, as of 31 May 2024.


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