Infrastructure Insights Portfolio Insights

Developed Markets Income Strategy January Commentary

Key Takeaways
  • Infrastructure and income-oriented sectors trailed global equities as strong jobs and GDP growth data in the U.S. seemed to push out potential rate cuts later in the year.
  • Within infrastructure, higher oil prices benefited energy infrastructure companies, while uncertainty over the timing of potential rate cuts in 2024, given strong economic data, weighed on longer-duration communications and renewables sectors.
  • We are maintaining our defensive positioning as we believe the impacts of tightened financial conditions will eventually affect the economy and ultimately corporate earnings.
Market Overview

Amid a tug of war between economic optimism and monetary policy uncertainty, equity markets generated positive gains in January. Infrastructure and income-oriented sectors broadly underperformed as strong jobs and GDP growth data in the U.S. seemed to push out potential rate cuts later in the year.

Oil prices rose in January, reversing a streak of monthly declines since September, as winter storms paused production across several U.S. oil fields. The price per barrel of WTI crude rose from US$71.65 at the beginning of the month to US$75.85 at the end. Higher oil prices benefited energy infrastructure companies, which outperformed the S&P Global Infrastructure Index. Uncertainty over the timing of potential rate cuts in 2024, given strong economic data, weighed on longer-duration communications and renewables sectors.

Portfolio Highlights

Our global listed infrastructure strategies underperformed infrastructure benchmarks and global equities for the month.

On a sector basis, energy infrastructure (+0.15%) was the top contributor for the month, led by Canadian company Gibson Energy (+0.10%). Gibson Energy is an oil midstream logistics provider in Western Canada and the U.S. The company continues to make progress in their negotiations with counterparties to extend the contract lengths at their recently acquired Texas Oil Export Terminal.

Turning to Western Europe, Spanish toll road operator Ferrovial (+0.20%) also contributed to monthly performance. Ferrovial operates and develops toll road concessions and airports globally. Ferrovial’s toll road asset in Toronto, the 407 ETR, announced a 15% increase in tariffs beginning in 2024, after a multiyear pause during COVID. The increase was better than what the market was expecting and derails the bear thesis around the asset being structurally impaired due to work-from-home trends.

Portuguese renewables utility Energias de Portugal (-0.51%) and U.S. communications company American Tower (-0.43%) were the main laggards in the month. Energias de Portugal (EDP) is an integrated utility based on the Iberian Peninsula, operating electricity distribution, generation and energy supply businesses. It has a growing exposure to global renewables through its 83% owned subsidiary EDPR, which primarily consists of onshore wind farms. EDP also operates electricity distribution and generation businesses in Brazil. EDP shares were weaker amid the renewables sector being out of favour, particularly in the context of the softer electricity pricing environment. We believe the market is underappreciating EDP’s integrated business model, where softer wholesale electricity pricing is a tailwind for its supply business due to lower input costs.

American Tower is a leading independent owner, operator and developer of wireless and broadcast communications infrastructure. The company has 41,000 sites in the U.S. and a further 139,000 sites across 19 countries, predominantly in emerging markets (75,000 in India, 40,000 in Latin America and 18,000 in Africa). American Tower underperformed after inflation and interest rates concerns caused investors to shift away from rate-sensitive defensive stocks.

There were no notable changes during the month.

All returns are in local currency.

Positioning and Outlook

Despite recent volatility, we are maintaining our defensive positioning as we believe the impacts of tightened financial conditions will eventually affect the economy and ultimately corporate earnings. In a slowing growth environment, we believe their predictability of earnings makes utilities attractive compared to general equity sectors where earnings uncertainty results in less confidence among investors and higher volatility.

We think utilities valuations, like infrastructure broadly, are attractive now, and we are starting to see some economic data show signs of a slowdown, which should be favourable to yield-sensitive assets.

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Infrastructure Insights Portfolio Insights
Infrastructure Income Strategy January Commentary

Infrastructure Income Strategy January Commentary

Infrastructure and income-oriented sectors trailed global equities as strong jobs and GDP growth data in the U.S. seemed to push out potential rate cuts later in the year.

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