Global Listed Infrastructure Monthly Review and Outlook

Market Review - as at May 2020

Global Listed Infrastructure climbed in May as investors anticipated rising economic activity levels. March quarter earnings results were accompanied by generally positive outlook commentary.

The best performing infrastructure sector was Towers (+8%) as investors remained enthusiastic about the long term structural growth drivers underpinning the sector. North American operators were buoyed by a broker upgrade that emphasized the key role these companies would play in the upcoming rollout of 5G networks. Railroads (+7%) also gained strongly. Freight rail stocks rallied as US states began to roll back travel and social distancing restrictions; while Japanese passenger rail gained as the country’s state of emergency was lifted. The worst performing infrastructure sectors were Gas Utilities (+1%) and Multi-Utilities (+3%) as the market favoured higher beta assets.

The best performing infrastructure region was Latin America (+8%). Investors looked past rising coronavirus transmission rates to focus on the region’s longer term growth prospects. Strong gains for towers, railroads and pipelines led the United States (+6%) higher. The worst performing infrastructure region was Asia ex-Japan (-2%) after China proposed a new national security law for Hong Kong, which triggered local protests and international condemnation. The United Kingdom (-1%) also lagged, reflecting muted returns from its defensive utilities sectors, having held up well earlier in the year.

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 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 mounting evidence from China, Europe and Australia, that people will prefer to travel by private car than by public transport in order to maintain social distancing.

We have reduced our underweight exposure to the Airports sector but remain cautious. While this month has seen an optimistic share price reaction, any sustained recovery in airline passenger numbers may be slow due to traveller wariness. A staggered re-opening of airports may start with domestic or regional flights, which are less valuable than international flights.

A prudent approach has also been maintained towards North American freight rail stocks, which are relatively sensitive to the economy. Freight volumes are down 20-25%, a level that railroads will not be able to match with cost reductions. The resulting earnings downgrades have yet to be reflected in market expectations.

The portfolio’s long-standing underweight exposure to Multi/ Electric utilities has moved to a small overweight. Many good quality utilities are trading at relatively appealing levels, having underperformed in recent rising markets. Regulated utility earnings should be materially more resilient than those of the broader market in the event of an extended economic slowdown or recession. Lower interest rates will be supportive of valuation multiples. Over the longer term, the structural growth drivers for this sector (build-out of renewables, replacement of aged networks) remain intact.

Source : Company data, First State Investments, as of end of May 2020.

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