By Peter Meany, Head of Global Listed Infrastructure at First Sentier Investors
Market review
The global listed infrastructure asset class gave up ground in November as news of a potentially more infectious coronavirus variant and indications that the US Federal Reserve may start to reduce monetary stimulus measures sooner than expected weighed on financial markets. The FTSE Global Core Infrastructure 50/50 index returned -2.2%, while the MSCI World index ended the month -1.6% lower.
The best performing infrastructure sector was water / waste (+1%) as investors sought defensive exposure. Toll roads (+1%) also held up well, with Asia-Pacific operators tending to outperform European peers.
The worst performing infrastructure sector was Pipelines (-6%), on concerns the Omicron coronavirus variant may hinder the global economic recovery and reduce demand for energy. Airports (-6%) underperformed as strong October passenger volumes were overshadowed by an uncertain outlook for global mobility, as a number of countries tightened travel restrictions.
The best performing infrastructure region was the UK (+7%), reflecting gains from its utility stocks. The worst performing infrastructure region was Canada (-5%) owing to underperformance from its pipelines.
During the month, US President Joe Biden signed the $1.2 trillion bipartisan infrastructure plan into law.
Outlook
We believe certain European, Asia Pacific and Latin American toll roads operators represent exceptional value at current levels, with traffic volumes proving significantly more resilient than those of other transport infrastructure assets. While new coronavirus variants have clouded the near term outlook, we remain confident that toll roads will lead a return to normal demand levels as economic activity levels continue to pick up.
In the railroads sector, North American freight rail operators are unique and valuable franchises. Their wholly-owned track networks are high quality infrastructure assets which can never be replicated. They typically operate under duopoly market conditions, with significant numbers of captive customers such as grain, chemical and auto producers giving them strong pricing power over long haul routes. Improving operating efficiency provides further scope to grow earnings.
Electric and multi-utilities represent a large segment of the global listed infrastructure universe, and are a good source of yield and defence, but some are trading at levels where limited mispricing is evident. That said, we do like companies with the scope to derive steady, low risk earnings growth from rate base investment (replacing ageing distribution networks, upgrading substations, expanding transmission lines); and the replacement of older coal-fired power stations with wind farms and solar power.
The emergence of the Omicron variant has underscored how vulnerable airlines remain to coronavirus-related disruption. We like higher quality European operators such as Spain’s AENA whose passenger mix is tilted towards Leisure and VFR (visiting friends and relatives) travellers. These categories could see numbers rebound sharply as travel restrictions are lifted.
