A monthly review and outlook of the Global Listed Infrastructure sector.
Market Review - as at March 2019
Global Listed Infrastructure gained in March as buoyant financial markets shrugged off global growth concerns. The FTSE Global Core Infrastructure 50/50 index rose +2.6%, while the MSCI World index^ ended the month +1.3% higher.
The best performing infrastructure sector was Towers (+11%) which climbed on indications that capex levels by large US mobile carriers will remain healthy throughout 2019, to the benefit of tower operators. The expected deployment of new spectrum bands for 5G represents an additional tailwind for the sector. Ports (+8%) increased as investors identified value in the sector, and the US and China remained engaged in trade talks. The worst performing sector was Airports (+1%), which continued to adjust to softening passenger growth rates. Mexican operators underperformed in the face of ongoing political and regulatory uncertainty.
The best performing region was Australia / NZ (+5%), where support was provided by lower US bond yields (the US 10 Year Treasury yield moved from 2.7% to 2.4% during the month) and an infrastructure-friendly state election result for New South Wales. The worst performing region was Latin America (-2%), as weakness in local indices weighed on infrastructure stocks.
Asset Allocation (%) 1
All stock and sector performance data expressed in local currency terms. Source: Bloomberg.
1 Source: Lipper & First State Investments, Nav-Nav (USD total return) as at 31 March 2019. Allocation percentage is rounded to the nearest one decimal place and the total allocation percentage may not add up to 100%. Fund inception date: 27 June 2008. Performance is based on First State Global Listed Infrastructure Fund Class I (USD – H-Dist). This is the semi-annually dividend distribution class of the Fund. The performance quoted are based on USD total return (with dividend reinvested). Dividends are not guaranteed and may be paid out of capital.
^MSCI World Net Total Return Index, USD.
*The benchmark displayed is UBS Global Infrastructure & Utilities 50-50 Index until 31 March 2015 and the FTSE Global Core Infrastructure 50/50 Index from 1 April 2015 onwards. Gross of tax benchmark performance is shown before 1 July 2016 and net of tax benchmark performance is shown after the aforementioned date.
Top 10 holdings (%) 2
The portfolio returned +2.2%3 in March, 39 basis points behind the FTSE Global Core Infrastructure 50/50 Index (USD, Net TR).
The best performing stock in the portfolio was American Tower (+12%). An upbeat presentation from the company highlighted healthy organic growth, driven by mobile carriers investing in their networks to keep pace with rapidly growing data usage; and the build-out of FirstNet – a nationwide broadband network for first responders. SBA Communications (+11%) and Crown Castle (+9%) also benefitted from the positive growth outlook.
North American pipelines continued their recent run of strong performance. Williams (+9%) established a Joint Venture with Canadian pension fund CPPIB in order to consolidate its Marcellus and Utica natural gas gathering and processing midstream assets. Under the terms of the JV, Williams will reduce its capex requirements and receive US$600 million from CPPIB. This builds on work already done by the company to improve its asset quality and balance sheet profile. Kinder Morgan (+4%) and TransCanada (+3%) also gained as the need for additional energy infrastructure was highlighted by EIA statistics showing that US natural gas production reached a record high for the second consecutive year in 2018.
Italian toll road operator Atlantia (+8%) rose after starting to simplify its business by disposing of a third of its stake in German engineering firm Hochtief. The stake was acquired in 2018 to facilitate the acquisition of Spanish toll road Abertis. Waning support for the populist left wing Five Star Movement suggests that Italy’s political risk is reducing. Australian peer Transurban (6%) finished the month strongly, helped by a victory for the Liberal Party in the New South Wales state election. The Liberals have pledged to continue to invest in infrastructure across the state, including new roads in Sydney that will complement Transurban’s existing network.
Canadian-listed multi-utility Emera (+7%) also gained following the sale of its Maine regulated utility for a very attractive price. The transaction strengthens Emera’s balance sheet, and will allow it to focus on its core regulated electric and gas utility businesses in Florida and Nova Scotia.
The worst performing holding in the portfolio was Brazil toll road operator CCR (-17%), which agreed a R$750 million (c. US$200 million) settlement payment with federal prosecutors relating to last year’s corruption investigation. Although the agreement had been expected, the amount was larger than anticipated.
Defensive, cash generative Japanese gas utilities Osaka Gas (-3%) and Tokyo Gas (-1%) lagged as investors rotated towards higher beta assets. The portfolio’s UK utility holdings also underperformed. National Grid (flat) gave up ground after plans by the opposition Labour Party to release a policy paper discussing its transfer to public ownership rekindled nationalisation concerns. Severn Trent (-2%) and SSE (flat) were also affected by the report. Political turmoil as the UK approached - and then passed - its Brexit deadline of 29 March presented an additional headwind.
2 Source: First State Investments as at 31 March 2019.
3 Performance is based on VCC ID share class, net of fees, expressed in USD. All stock and sector performance data expressed in local currency terms. Source: Bloomberg.
No new holdings were added to the Fund in March, and positions in existing holdings were generally maintained at current levels.
Market Outlook and Fund 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.
The Fund is positioned with toll roads as its largest sector overweight. Transurban, Atlantia and Vinci have high barriers to entry, strong free cash flow and inflation linked pricing. We are attracted to their reasonable valuation multiples and well-supported dividend yields of between 3% and 6%. Growing urbanisation and worsening traffic congestion are likely to underpin long term demand. EM peers operate high growth toll roads with well-established concession agreements, providing an essential service to some of the most densely populated regions in the world.
The Fund is also overweight energy pipelines such as Kinder Morgan and Williams. These companies own assets connecting North American oil and gas fields with processing facilities and export terminals, positioning them to benefit from rising production levels and US energy exports. Tower companies like American Tower and Crown Castle are profiting as telecom companies seek to improve their networks, driven by structural growth in demand for mobile data.
The portfolio largest underweight position is the Airports sector. The sector has faced a deteriorating outlook for passenger volumes, aeronautical charges and retail spend in recent months, following years of exceptional growth. Despite the resulting pullback many airport stocks still appear overvalued, and we are content to remain underweight. A number of high quality US utilities also continue to trade at valuations that we find difficult to justify based on company fundamentals.
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.
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