A monthly review and outlook of the Global Listed Infrastructure sector.
Market Review - as at February 2020
Global Listed Infrastructure fell in February on concerns that the spread of COVID-19 could weigh more heavily on economic activity levels than initially anticipated. The best performing infrastructure sector was Towers (-1%), which were supported by the prospect of robust capex spending on tower services by US mobile carriers into the medium term, as the proposed T-Mobile / Sprint merger drew a step closer.
The worst performing infrastructure sector was Airports (-12%), which saw sharp near term falls in passenger volumes. Sydney Airport (-7%, not held) noted that passenger traffic was trending down in-line with the SARS experience of 2003, with falls of between -15 and -20% for International passengers; and declines of between -5 and -10% for Domestic passengers.
Utilities (-7% to -9%) fell during the month, despite their defensive earnings and a backdrop of falling bond yields. This provides a reminder that utility stocks, as listed assets, can be affected by short periods of elevated market volatility. It also illustrates the indiscriminate nature of the recent sell-off. We anticipate that their essential service nature and domestic focus will enable utilities to hold up better than most sectors in the event of an economic slowdown over coming months.
The best performing infrastructure region was the UK (-4%), where utilities were supported by relatively modest valuation multiples. Over the longer term, the UK’s “net zero by 2050” carbon emission target is expected to present the country’s utilities with significant investment opportunities in the buildout of renewables and transmission & distribution network upgrades. The worst performing infrastructure regions were Europe ex UK (-11%) and Japan (-10%) as confirmed virus cases increased outside China, with Italy and Japan seemingly amongst the countries hardest hit. Transport infrastructure stocks in both regions underperformed.
All stock and sector performance data expressed in local currency terms. Source: Bloomberg.
Market Outlook and Fund Positioning
The Fund 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.
COVID-19 developments overshadowed financial markets for a second consecutive month in February. Our expectation remains that infrastructure’s essential service provision and contracted or regulated business models will insulate the asset class from the worst of its effects.
Transport is likely to be the most impacted infrastructure subsector, with airports and passenger rail the most vulnerable.
For quality airports, regulated aeronautical revenues, retail minimum guarantees and property leases should help mitigate the impact.
Pipelines are typically contracted or regulated assets, so cash flows are unlikely to be impacted in the near term. That said, pipeline stocks may underperform reflecting the impact of reduced commodity prices on growth outlook and rising counter-party risks.
Utilities should be least impacted by COVID-19, particularly those with regulated networks where revenues are de-coupled from volumes. There is a minor risk for some growth utilities that supply chains are disrupted – for example solar panels. Wireless towers may also see some supply chain disruption for 5G equipment. In the medium term the Coronavirus probably highlights the need for improved wireless / remote / VC capabilities which should be supportive of tower growth.
As long-term investors we have only made minor changes to the portfolio in recent weeks, for example reducing our underweight in airports.
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