A monthly review and outlook of the Global Listed Infrastructure sector.
Market Review - as at March 2020
Global Listed Infrastructure fell in March as lockdown measures and rising unemployment rates triggered market volatility. In this environment, the best performing infrastructure sector was Towers (-2%). The sector is expected to benefit from increased demand on telecom networks, owing to a rise in video conferencing, HD streaming and gaming. Utilities (-3% to -9%) endured a volatile month, perhaps reflecting heightened uncertainty and an indiscriminate rush for liquidity. However the stable nature of their regulated business models, and inelastic demand for their services, enabled them to outperform the broader market.
The worst performing infrastructure sector was Airports (-28%), as the rapid spread of coronavirus and the resulting traffic restrictions saw passenger numbers plunge. Pipelines (-24%) were impacted by both demand and supply shocks. Reduced economic activity impacted demand for energy while the breakdown of cooperation between oil producers Russia and Saudi Arabia added a supply shock. The resulting collapse in oil prices placed North American E&P companies under pressure, raising questions around future growth and counter-party risks for pipelines.
The best performing infrastructure region was Japan (+7%), traditionally viewed as a haven in times of crisis. A high utilities weighting helped to limit UK (-6%) losses. The worst performing infrastructure region was Europe ex-UK (-23%), which became the epicentre of the virus after Asian countries slowly appeared to gain the upper hand.
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. Toll roads are trading at levels that offer deep value opportunities for patient investors. Traffic has reduced significantly but these assets are still providing a reliable service to essential parts of the economy. We note that heavy vehicles (which pay much higher tolls) have been less affected than light vehicle volumes. We are encouraged by signs that demand can quickly recover as conditions begin to normalize. Indications from China also suggest that as movement restrictions are lifted, people are returning to work via cars rather than buses or subways. This should be positive for a rebound in toll road volumes.
The portfolio is also overweight the Pipelines sector. Share price falls have moved several stocks to higher rankings within our Value / Quality investment process. Within this space we have focused our exposure on companies with healthier balance sheets and stronger counterparties, which own and operate high quality infrastructure networks playing crucial roles within the North American energy market.
We have begun to slowly reduce the scale of the portfolio’s underweight exposure to Airports. However, we are conscious that any recovery in airport passenger numbers may be slow due to traveller caution, making it difficult to predict when volumes will recover to pre-COVID 19 levels. Better entry points may become available - for example in the event of bankruptcies within the airline space.
The portfolio ’s long-standing underweight exposure to Multi/ Electric utilities has moved to a small overweight. Many good quality utilities are now trading at relatively appealing levels. Lower interest rates will be supportive of valuation multiples. Utility earnings should be materially more resilient than those of the broader market in the event of an extended economic slowdown or recession.
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