Global Listed Infrastructure Monthly review and outlook

Global Listed Infrastructure dipped in January, giving back some of the strong gains achieved during the December quarter of 2023. The FTSE Global Core Infrastructure 50/50 index returned -2.4% while the MSCI World index^{^} ended the month +1.2% higher.

The best performing infrastructure sector was Other (+6%), which consists of ports, satellites and merchant power operators. Emerging Markets (EM) ports led this group of stocks higher. Railroads (+1%) also increased, as investors focused on the scope for North American freight rail volumes and margins to improve over the course of coming months. Japanese passenger rail stocks were buoyed by positive passenger trends. The worst performing infrastructure sector was Towers / Data Centers (-7%), as positive economic indicators saw interest rate cut expectations subside.

The best performing infrastructure region was Japan (+5%) owing to strong returns from the country’s electric utilities (not in our Focus List). The worst performing infrastructure region was the United States (-4%), as a protracted timeframe for expected interest rate cuts weighed on its Towers and Utilities.

^{^} MSCI World Net Total Return Index (USD) is provided for information purposes only. Index returns are net of tax. Data to 31 January 2024. Source: First Sentier Investors / Lipper IM. All stock and sector performance data expressed in local currency terms. Source: Bloomberg.

The Portfolio 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 remain optimistic about the substantial investment opportunities associated with the decarbonisation of the world’s energy needs. Utilities, which represent about a half of the global listed infrastructure opportunity set, 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. Overall electricity demand is expected to grow in many regions, driven in part by additional data centres needed to support internet activity and the AI boom.

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 and Data Centres. 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.

There remains scope for continued recovery in the transport infrastructure space. We believe toll roads represent exceptional value at current levels, with traffic volumes proving resilient and inflation-linked concession agreements helping to support earnings growth. We also have a largely positive view of North American freight railroads. While the sector faced challenges in 2023, these companies are unique and valuable franchises. Their wholly-owned track networks are high quality infrastructure assets which can never be replicated. They typically operate under duopoly market conditions, with significant numbers of captive customers such as grain, chemical and auto producers giving them strong pricing power over long haul routes. Improving operating efficiency provides further scope to grow earnings. However, we believe some caution is merited currently, owing to recent volume softness.