A monthly review and outlook of the Global Listed Infrastructure sector.
Market Review - as at April 2020
Global Listed Infrastructure rallied in April as substantial government stimulus packages restored a measure of confidence to financial markets.
The best performing infrastructure sector was Toll Roads (+16%), which climbed on anticipation of a gradual return of traffic volumes if lockdown measures were to ease. Pipelines (+16%) rose by a similar amount despite ongoing turmoil in energy markets. Investors focused on the intrinsic value of these extensive energy infrastructure networks, which are largely contracted or regulated. Utilities (+2% to +5%) delivered more modest gains, as investors sought value in higher beta sectors.
The best performing infrastructure region was Australia NZ (+15%), which rallied on the view that the region appears to be coping with coronavirus impacts; and that its infrastructure stocks may be at the forefront of any broader recovery. The region’s toll roads and airports fared particularly well. The worst performing infrastructure region was Japan (–4%) which gave back some of the previous month’s gains. The UK (flat) also underperformed as its utility stocks lagged.
All stock and sector performance data expressed in local currency terms. Source: Bloomberg.
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. Current valuations, even after April’s partial rebound, imply multi-year traffic declines and ignore the reality that interest rates will be lower going forward. There is a valid argument that increased flexibility to work-from-home may result in a permanent adjustment to traffic. There is a stronger argument, and evidence from China, that as shutdowns are eased, people will prefer to travel by private car than by public bus / subway to maintain social distancing.
The portfolio is also overweight gas utilities. This exposure is made up of specialist US and European companies operating in niche market areas; a stable Japanese name with a strong balance sheet that can add stability to the portfolio; and the newly added Chinese gas utilities which are positioned to benefit from structural growth, in a region that appears to have coped well with the coronavirus outbreak.
We have begun to reduce the scale of the portfolio’s underweight exposure to Airports, but remain cautious on the sector. Any recovery in airport passenger numbers may be slow due to traveller caution, making it difficult to predict when volumes will recover to pre-coronavirus levels. A staggered re-opening of airports may start with domestic or regional flights, which are far less valuable than international flights.
A prudent approach has been maintained towards North American freight rail stocks, which are relatively sensitive to the economy. Freight volumes are likely to turn down in the coming months. We expect US carloads down ~25% with earnings downgrades of similar magnitude. When these risks are better reflected in valuations there should be an opportunity to add.
The portfolio’s long-standing underweight exposure to Multi/ Electric utilities has moved to neutral. Many good quality utilities are now trading at relatively appealing levels, having underperformed in April’s rising markets. Lower interest rates will be supportive of valuation multiples. Regulated utility earnings should be materially more resilient than those of the broader market in the event of an extended economic slowdown or recession. Over the longer term, the structural growth drivers for this sector (build-out of renewables, replacement of aged networks) remain intact.
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