By Peter Meany, Head of Global Listed Infrastructure at First Sentier Investors.
Market review
The global listed infrastructure asset class rallied in October, helped by robust September quarter earnings. The FTSE Global Core Infrastructure 50/50 index* returned +3.1%, while the MSCI World index ended the month +5.3% higher.
The best performing infrastructure sector was railroads (+14%), as North American freight rail operators shrugged off supply chain hold-ups to deliver very strong earnings results. Pipelines (+6%) continued to gain on the view that high energy prices and a recovering global economy would provide the sector with favourable operating conditions.
The worst performing infrastructure sector was toll roads (-3%), as the spread of delta variant coronavirus continued to affect Asia Pacific traffic volumes. Faster than expected interest rate rises by Brazil’s central bank weighed on that market’s long duration stocks, including toll roads.
The best performing infrastructure regions were the United States (+7%) and Canada (+6%), reflecting strong gains for their railroad, pipeline and tower stocks. The worst performing infrastructure region was Japan (-8%). The country’s utilities, which are largely dependent on imported natural gas and coal, faced concerns that profits would be negatively affected by higher input costs.
Outlook
The asset class is positioned to benefit from a number of positive drivers. Government attempts to bolster economic fundamentals through infrastructure and green energy stimulus plans are likely to prove supportive of many global listed infrastructure firms. In particular, the ongoing repair and replacement of old energy transmission and distribution grids, along with the accelerating build-out of renewables, should represent a steady source of utility earnings growth over many years. The 2021 United Nations Climate Change Conference (COP26), held in Glasgow, highlighted the scale of the work required to successfully transition away from fossil fuels (a message reiterated by the International Energy Agency in their annual World Energy Outlook report). Large-cap, listed electric utilities such as NextEra Energy and Iberdrola will be at the heart of this vital transformation.
Ever-increasing demand for wireless data / connectivity continues to underpin steady earnings growth for towers and data centres, insulating them from the ebbs and flows of the broader global economy. The changes required during the coronavirus pandemic have already led to a greater reliance on wireless data in many people’s everyday lives. The adoption of 5G technology over the medium term will require networks to handle increased data speed, and a much higher number of connected devices. Reflecting this, networking and telecoms company Ericsson expects wireless data traffic within the US to grow by a compound annual growth rate of 28% between 2021 and 2026.
There remains scope for a recovery in traffic / passenger volumes across coronavirus-impacted infrastructure sectors such as toll roads, airports and passenger rail following the rollout of vaccine programs. Traffic volumes have proved more resilient than those of other transport infrastructure assets, and toll roads are now leading the way towards (or have already achieved) a return to normal demand levels. We remain more cautious on the airports sector, as it remains unclear how quickly consumer behaviour will return to normal. We prefer airports with a tourism / leisure focus to those with an emphasis on business travellers.
