First Sentier Investors: Global listed infrastructure outlook and sector review – March 2022

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Market outlook

We continue to like utilities with a renewables focus and the scope to derive steady, low-risk earnings growth by replacing old fossil fuel power plants with solar and wind farms, and by upgrading and expanding the networks needed to connect these new power sources to the end user. Technology advances and lower costs for utility-scale battery storage will enable renewables to represent an ever-greater share of the overall electricity generation mix. In the medium term, the roll out of electric vehicles is then expected to provide an additional boost to utilities – first via investment opportunities associated with linking EV charging stations to the grid; and then via higher overall demand for electricity.

Toll road operators are likely to fare relatively well in a higher inflation environment. Many toll roads have concession agreements that specify how prices can be increased, with an option to follow the inflation rate or an agreed percentage – whichever is higher. Traffic volumes are proving significantly more resilient than those of other transport infrastructure assets, benefitting toll road companies in Europe, Asia Pacific and Latin America.

The airports sector remains vulnerable to coronavirus-related disruption. As a result, we favour more short‑haul, leisure-exposed airports, particularly European airports with large intra-Europe exposure where border restrictions are likely to be less cumbersome.

Market review

The global listed infrastructure asset class rallied in March despite elevated inflation levels, tighter coronavirus restrictions in China, and a mounting list of Western sanctions on Russia. The FTSE Global Core Infrastructure 50/50 index* returned +6.9%, while the MSCI World index* ended the month +3.0% higher. *AUD Hedged Net TR

The best performing infrastructure sector was Railroads (+11%), on the view that higher commodity prices would prove supportive of North American freight rail operators. Towers / Data Centres (+11%), which had underperformed in January and February owing primarily to concerns for rising rates, gained ground as investors refocused on these companies’ strong fundamentals and structural earnings growth drivers. The worst performing infrastructure sector was Airports (+3%), owing to rising coronavirus case numbers in Europe and the imposition of additional lockdown measures under China’s Zero-Covid policy, following an outbreak in Shanghai.

The best performing infrastructure region was the United States (+10%), reflecting strong gains from its utilities, railroads and towers. The worst performing infrastructure regions were Asia ex-Japan (+2%) and Japan (+2%), owing to underperformance from their utilities on concerns for rising input costs. China’s lockdown measures represented an additional headwind.

The US Federal Reserve raised interest rates by 25 basis points during March – its first increase since 2018 – and predicted six further increases during the 2022 calendar year. While global listed infrastructure is a relatively interest rate sensitive asset class, its strong performance in March suggests that these moves had already been anticipated and priced in by the market.

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