A monthly review and outlook of the Global Listed Infrastructure sector.
Market Review - as at December 2019
Global Listed Infrastructure rallied in December against a background of positive macroeconomic news, including fresh progress in US-China trade talks and a conclusive UK general election result.
The best performing infrastructure sector was Towers (+6%), reflecting the enduring appeal of this business model. Structural growth in demand for mobile data (underpinned by the ever-growing popularity of video streaming) continues to drive steady earnings growth, largely insulated from the ebbs and flows of the broader global economy. The worst performing infrastructure sector was Airports (+1%), on concerns that future passenger growth rates may struggle to match those seen in recent years. Underperforming stocks included Flughafen Zuerich (flat, not held) whose successful bid to build and operate the new Jewar Airport in Delhi, India was met with a lacklustre market response.
The best performing infrastructure region was Latin America (+8%), aided by an improving political environment for infrastructure companies in Mexico and the view that lower interest rates and investor-friendly reforms will prove supportive of Brazil’s infrastructure companies. The worst performing region was Australia / NZ (-1%), where higher bond yields and concerns for full valuation multiples weighed on airports, toll roads and utilities.
All stock and sector performance data expressed in local currency terms. Source: Bloomberg.
The outlook for global listed infrastructure is positive. The asset class performed well during 2019, as lower bond yields provided a stronger than expected tailwind for infrastructure valuations. However, taken in aggregate with headwinds of 2018, the two-year return is in line with our long term expectations. In addition, listed infrastructure companies are delivering strong earnings growth. Combined with lower discount rates (from falling interest rates), this means that intrinsic asset values have increased meaningfully.
If, as expected, bond yields remain low in 2020, infrastructure’s income generative nature is likely to drive continued investor demand for the asset class. In addition, if an economic slowdown were to make it harder for the broader market to grow earnings, infrastructure’s regulated or contracted earnings streams would become increasingly valuable.
Political and regulatory change will remain the key risk in the months ahead. Continuing trade tariffs, Brexit tensions, populist politics in Italy and Mexico, and the US presidential election could all present challenges for infrastructure investors. Reassuringly, we see strong bipartisan support for infrastructure investment globally. As a result the pipeline of capital expenditure opportunities for listed infrastructure remains robust - for example replacing aged infrastructure assets, reducing urban congestion, and decarbonising electricity networks.