Global Listed Infrastructure Monthly Review and Outlook

Market Review - as at March 2020

Global Listed Infrastructure fell in March as lockdown measuresand rising unemployment rates triggered market volatility. Liquid asset classes displayed high levels of correlation; the FTSE Global Core Infrastructure 50/50 index ended the month -15.5% lower, while the MSCI World index^{^} dropped –13.2%.

The best performing infrastructure sector was Towers (-2%). The sector is expected to benefit from increased demand on telecom networks, owing to a rise in video conferencing, HD streaming and gaming. Utilities (-3% to -9%) endured a volatile month, perhaps reflecting heightened uncertainty and an indiscriminate rush for liquidity. However the stable nature of their regulated business models, and inelastic demand for their services, enabled them to outperform the broader market.

The worst performing infrastructure sector was Airports (-28%), as the rapid spread of coronavirus and the resulting traffic restrictions saw passenger numbers plunge. Pipelines (-24%) were impacted by both demand and supply shocks. Reduced economic activity impacted demand for energy while the breakdown of cooperation between oil producers Russia and Saudi Arabia added a supply shock. The resulting collapse in oil prices placed North American E&P companies under pressure, raising questions around future growth and counter-party risks for pipelines.

The best performing infrastructure region was Japan (+7%), traditionally viewed as a haven in times of crisis. A high utilities weighting helped to limit UK (-6%) losses. The worst performing infrastructure region was Europe ex-UK (-23%), which became the epicentre of the virus after Asian countries slowly appeared to gain the upper hand.

All stock and sector performance data expressed in local currency terms. Source: Bloomberg. 

 ^{^}MSCI World Net Total Return Index, USD.

Market Outlook and Strategy

We 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 portfolio remains positioned with toll roads as its largest sector overweight. Toll roads are trading at levels that offer deep value opportunities for patient investors. Traffic has reduced significantly but these assets are still providing a reliable service to essential parts of the economy. We note that heavy vehicles (which pay much higher tolls) have been less affected than light vehicle volumes. We are encouraged by signs that demand can quickly recover as conditions begin to normalize. Indications from China also suggest that as movement restrictions are lifted, people are returning to work via cars rather than buses or subways. This should be positive for a rebound in toll road volumes.

The portfolio is also overweight the Pipelines sector. Share price falls have moved several stocks to higher rankings within our Value / Quality investment process. Within this space we have focused our exposure on companies with healthier balance sheets and stronger counterparties, which own and operate high quality infrastructure networks playing crucial roles within the North American energy market.

We have begun to slowly reduce the scale of the portfolio’s underweight exposure to Airports. However, we are conscious that any recovery in airport passenger numbers may be slow due to traveller caution, making it difficult to predict when volumes will recover to pre-COVID 19 levels. Better entry points may become available - for example in the event of bankruptcies within the airline space.

The portfolio’s long-standing underweight exposure to Multi/ Electric utilities has moved to a small overweight. Many good quality utilities are now trading at relatively appealing levels. Lower interest rates will be supportive of valuation multiples. Utility earnings should be materially more resilient than those of the broader market in the event of an extended economic slowdown or recession.

Important Information

Investment involves risks, past performance is not a guide to future performance. Refer to the offering documents of the respective funds for details, including risk factors. The information contained within this document has been obtained from sources that First State Investments (“FSI”) believes to be reliable and accurate at the time of issue but no representation or warranty, expressed or implied, is made as to the fairness, accuracy or completeness of the information. Neither FSI, nor any of its associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from any use of this. It does not constitute investment advice and should not be used as the basis of any investment decision, nor should it be treated as a recommendation for any investment. The information in this document may not be edited and/or reproduced in whole or in part without the prior consent of FSI. 

This document is issued by First State Investments (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission in Hong Kong. First State Investments is a business name of First State Investments (Hong Kong) Limited. 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.

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 First State Investments’ portfolios at a certain point in time, and the holdings may change over time. 

First State Investments (Hong Kong) Limited 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.