A monthly review and outlook of the Global Listed Infrastructure sector.
Market Review - as at November 2019
Global Listed Infrastructure dipped in November as hopes for rising economic growth saw investors shift into higher beta assets.
In this environment, the best performing infrastructure sector was Railroads (+4%). North American freight rail operators rallied as improving US PMI data and a resilient US jobs market implied that haulage volumes may have bottomed. Pipelines (+2%) also outperformed as investors identified value. November saw the US achieve its first full month as a net exporter of crude oil and petroleum products since records began in 1949, highlighting the need for energy infrastructure to transport oil and gas to coastal export facilities. As well as rising oil and gas output levels, this milestone also reflects the growth of renewables within the US.
After strong gains in the first half of 2019, Utilities (-1% to -4%) lagged as investors rotated towards more cyclical market segments. November saw a lower than expected rate case outcome in Texas; and the adoption of a new methodology by the Federal Energy Regulatory Commission to determine whether utilities’ allowed rates of Return on Equity are reasonable. Both events sparked concerns that future rate case outcomes for US utilities may align more closely with the lower interest-rate environment. Towers (-2%) also fell ahead of a new legal challenge to the planned merger between US mobile telecom companies (and tower customers) T-Mobile and Sprint.
The best performing infrastructure region was Latin America (+4%). Following the successful passage of Brazil’s key pension reform bill in October, the government can now focus on its process of privatising the country’s infrastructure assets, which is expected to provide new growth opportunities for local and overseas companies. The worst performing region was Asia ex Japan (-2%), where softer volume growth weighed on the China’s gas utilities.
Fund Performance
The Fund ended the month +0.1% higher1 , 90 basis points ahead of the FTSE Global Core Infrastructure 50/50 TR Index (SGD).
The best performing stock in the portfolio was US Class I railroad Union Pacific (+7%), whose track network provides important connections between the US west coast Ports of LA and Long Beach, and the midwest hub of Chicago. As well as being buoyed by recently improving economic data, the company has offset recent volume declines with substantial headcount/ cost reductions. East Coast peer Norfolk Southern (+6%) has also reduced its headcount significantly in recent months, emphasizing the freight rail sector’s ability to improve business productivity in a challenging operating environment.
The portfolio’s toll road holdings delivered largely positive returns. PINFRA (+6%), which operates Mexico City-focused toll roads, gained on the appeal of its high growth market exposure and defensive balance sheet. Brazil’s largest listed toll road operator CCR (+5%) rallied on the view that the company was well positioned to benefit from the expected deregulation of the country’s toll road and airport assets. Australia’s Transurban (+3%) announced the on-time and on-budget completion of its 395 Express Lanes project - a 13 kilometre section of tolled lanes catering to Washington DC commuters, which connects to Transurban’s existing network.
UK utilities continued their strong run ahead of the December general election. Opinion polls have placed the Conservative Party well ahead of their Labour Party rivals, implying that renationalisation risk is fading. Both the main parties’ manifestos include substantial commitments to investment in offshore wind projects, which could present growth opportunities for electric utility SSE (+1%). National Grid (+1%) announced well-received half year earnings, helped by efficient operating performance at its US electric and gas transmission and distribution business. Severn Trent (+1%) also gained after announcing in line half year earnings in line with consensus, and increasing its interim dividend by RPI plus 4% - in line with its current policy.
The worst performing stock in the portfolio was CenterPoint Energy (-15%), a US electric and gas utility whose assets include regulated utility businesses in eight states and a majority stake in energy infrastructure company Enable Midstream Partners. An unfavourable proposed rate case outcome for the company’s Texas electric utility could reduce group profits and lead to a larger than expected equity issuance. Other US utility underperformers included UGI Corp (-9%), which reported a lacklustre September quarter result, owing to lower than expected margins at its propane distribution business AmeriGas, and weaker than expected profits from its Energy Services midstream division. NiSource (-6%) announced they plan to raise equity to finance some of the costs from the Massachusetts gas leak incident in 2018.
All stock and sector performance data expressed in local currency terms. Source: Bloomberg.
1 The First State Global Infrastructure’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.
Asset Allocation (%) 2
Top 10 holdings (%) 2
Italian toll road operator Atlantia (-9%) came under renewed political pressure after Italy’s transport minister said that the government may yet revoke the company’s motorway concession following the 2018 Genoa bridge collapse. Revocation still appears unlikely, given the large amount of compensation required; and the lack of resources within the government to manage the concession. Atlantia announced it would not pay an interim dividend for a second consecutive year.
The portfolio’s mobile tower holdings also underperformed. The planned merger between T-Mobile and Sprint - two of the tower companies’ largest customers - faces a legal challenge from several US states on the grounds that the move will be negative for consumers. Crown Castle (-4%), American Tower (-2%) and SBA Communications (-2%), which are prepared for the merger to go ahead and for satellite operator Dish to be established as a new fourth player in the US mobile telecom space, were affected by the resulting uncertainty.
2 Source: Lipper & First State Investments. Single pricing basis with net income reinvested. Data as at 30 November 2019. Allocation percentage is rounded to the nearest one decimal place and the total allocation percentage may not add up to 100%. The First State Global Infrastructure 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
Fund Activity
The Fund sold its position in Chinese toll road operator Shenzhen Expressway. Share price gains, despite recent volatility in Asian markets, reduced mispricing and moved the stock lower within our investment process.
Market Outlook and Portfolio Positioning
The Fund invests in a range of global listed infrastructure assets including toll roads, airports, ports, 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.
Key drivers of earnings growth for these companies include long-term, structural themes. US regulated utilities NextEra Energy and Eversource Energy are deriving low risk earnings growth from the build-out of renewables and associated transmission networks. Tower companies SBA Communications and Crown Castle are profiting as telecom companies seek to upgrade and enhance their mobile phone networks, to meet structural growth in demand for mobile data. Pipeline companies Williams and Enterprise Products Partners own the networks which connect US oil and gas fields with processing facilities and export terminals, positioning them to benefit from rising production levels and US energy exports.
Other companies in the Fund operate from strong strategic positions, with high barriers to entry. Freight rail operators Union Pacific and Norfolk Southern are unique and valuable franchises with strong pricing power and the ability to grow earnings over time by improving operational efficiency. Toll road operators Transurban and Vinci have strong free cash flow and inflation linked pricing. Growing urbanisation and worsening traffic congestion are likely to underpin long term demand.
Important Information
This document is prepared by First State Investments (Singapore) (“FSI”) (Co. Reg No. 196900420D.) whose views and opinions expressed or implied in the document are subject to change without notice. FSI accepts no liability whatsoever for any loss, whether direct or indirect, arising from any use of or reliance on this document. This document is published for general information and general circulation only and does not have any regard to the specific investment objectives, financial situation and particular needs of any specific person who may receive this document. Investors may wish to seek advice from a financial adviser and should read the Prospectus, available from First State Investments (Singapore) or any of our Distributors before deciding to subscribe for the Fund. In the event that the investor chooses not to seek advice from a financial adviser, he should consider carefully whether the Fund in question is suitable for him. Past performance of the Fund or the Manager, and any economic and market trends or forecast, are not indicative of the future or likely performance of the Fund or the Manager. The value of units in the Fund, and any income accruing to the units from the Fund, may fall as well as rise. Investors should note that their investment is exposed to fluctuations in exchange rates if the base currency of the Fund and/or underlying investment is different from the currency of your investment. Units are not available to US persons.
Applications for units of the Fund must be made on the application forms accompanying the prospectus. Investments in unit trusts are not obligations of, deposits in, or guaranteed or insured by First State Investments (Singapore), and are subject to risks, including the possible loss of the principal amount invested.
Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of FSI’s portfolios at a certain point in time, and the holdings may change over time.
In the event of discrepancies between the marketing materials and the Prospectus, the Prospectus shall prevail.
In Singapore, this document is issued by First State Investments (Singapore) whose company registration number is 196900420D. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. First State Investments (registration number 53236800B) is a business division of First State Investments (Singapore). The First State Investments logo is a trademark of the Commonwealth Bank of Australia or an affiliate thereof and is used by First State Investments under licence.
First State Investments (Singapore) is part of the investment management business of First Sentier Investors, which is ultimately owned by Mitsubishi UFJ Financial Group, Inc. (“MUFG”), a global financial group. First Sentier Investors includes a number of entities in different jurisdictions, operating in Australia as First Sentier Investors and as FSI elsewhere.
MUFG and its subsidiaries are not responsible for any statement or information contained in this document. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk, including loss of income and capital invested.
