A monthly review and outlook of the Global Listed Infrastructure sector.
Market Review - as at January 2020
Global Listed Infrastructure delivered steady gains through January as investors sought defensive assets.
The best performing infrastructure sector was Electric Utilities (+7%) which rallied as bond yields fell sharply. The US 10-year Treasury yield declined from 1.9% to 1.5% over the course of the month. Growing awareness of the growth opportunities arising as power generation shifts from fossil fuels towards renewables aided sentiment towards the sector. Water Utilities (+6%) and Multi-Utilities (+5%) also outperformed in this environment. Airports (-3%) and Ports (-2%) were the worst performing sectors, on the view that global economic activity levels and trade volumes could be affected by coronavirus. Chinese passengers are an increasingly important part of Airport retail earnings, spending on average three times as much as passengers from other countries.
The best performing infrastructure region was the US (+6%), reflecting strong gains from its utility and tower stocks. The UK (+5%) outperformed as investors welcomed the country’s reduced political risk, and anticipated future offshore wind and transmission investment opportunities for its utilities. The worst performing infrastructure regions were Japan (-4%) and Asia ex-Japan (-3%), as the region’s airports, ports and toll roads bore the brunt of concerns for economic growth rates and regional tourist volumes.
Market Outlook and Strategy
We 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 portfolio 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 historical dividend yields of between 3% and 6%. Healthy fundamentals, including high operating margins and traffic growth rates that can match or exceed GDP growth over the long term, are expected to underpin robust future earnings growth. 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 portfolio is also overweight energy pipelines. The portfolio has built positions in several companies with unique and long life energy infrastructure networks trading at appealing valuations, and paying generous distribution yields. Although general sentiment towards pipelines remains cautious, our exposure to the sector is consistent with our contrarian investment approach. We remain confident that stronger balance sheets, lower commodity exposure and simpler corporate structures will in time reflect in higher valuation multiples.
The portfolio is underweight Multi/Electric Utilities. A number of high quality US names continue to trade at valuations that we find difficult to justify based on company fundamentals. The portfolio has also maintained its underweight exposure to Airports, with holdings limited to leading European and Mexican operators. The airport sector faces medium term headwinds following a long period of above-average growth, with January’s events providing a reminder of their potential vulnerability to external factors.
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