Developed Markets Infrastructure Income Model Commentary August

Key Takeaways

• Infrastructure delivered positive returns in August, slightly trailing global equities on a U.S. dollar basis in a month of gains across most equity indexes.

• Passenger traffic lifted airports, gas utilities benefited from strong fundamentals, while higher bond yields and some idiosyncratic drivers weighed on renewables and communications towers.

• We remain somewhat defensively positioned with an emphasis on utilities, which have very strong growth profiles, particularly in the U.S., driven by AI data centre power demand, industry decarbonisation and resiliency spending (with recent quarterly reports continuing to affirm this).

Market Overview

Infrastructure delivered positive returns for the month, slightly trailing global equities on a U.S. dollar basis in a month of gains across most equity indexes.

GDP-sensitive infrastructure performed well, with European and Mexican airports leading the infrastructure sectors in our coverage universe, helped by continued passenger growth during the summer season. Strong fundamentals were beneficial for gas utilities, in particular in Canada, where companies reported high utilisation of pipeline assets, as well as continued momentum in project origination in the second quarter, driven by strong demand from customers for additional capacity.

Renewables and communication towers were the laggards for the month. Renewables sentiment was weighed down by the U.S. government’s continued renewables policy interventions, and orders to halt select offshore wind projects. Communication towers continue to face elevated customer churn over the next few years as a result of recent carrier consolidations, including the Sprint/T-Mobile and AT&T/EchoStar deals. 

Looking ahead, we continue to see opportunities driven by decarbonisation, for example electric utilities in the U.S., the U.K. and Europe, and the buildout of renewables, poles and wires to be able to move energy around the grid.

U.S. and European electric and water utilities are also investing in their networks to improve the resiliency of the grid to adapt to or mitigate the effects of climate change. AI and data centres are also requiring a significant buildout of energy infrastructure, in particular for U.S. electric and gas utilities, as we saw reflected in some of the leading performers this month.

Portfolio Highlights

Our global listed infrastructure strategies underperformed global equities as well as relevant infrastructure benchmarks for the month.

On a sector-specific basis, gas utilities (+0.73%) were the top contributors for the month, with Canadian companies TC Energy (+0.29%) and Enbridge (+0.23%) the lead performers. TC Energy (TC) is a North American company managing over 93,300 km of natural gas pipelines and 4.3 GW of power assets. Nearly 100% of TC’s cash flows are backed by stable long-term contracts and cost-of-service tolling with creditworthy counterparties.

Enbridge owns and operates one of the largest oil and gas pipeline networks in North America. The company also owns regulated gas distribution utilities in Ontario, Canada.

TC Energy and Enbridge both reported strong second-quarter earnings results, with high asset utilisation, along with strong momentum on project origination.

U.K. electric utility SSE (‑0.28%) and U.S. electric utility Constellation Energy (‑0.32%) were the largest detractors.

SSE is a diversified energy utility headquartered in Scotland, U.K. It is vertically integrated, operating over the entire supply chain in the U.K., with generation (including hydro, wind, CCGT), electricity networks and retail businesses (primarily B2B). It is the U.K.’s largest renewable energy generator. SSE’s share price was impacted by a higher rate environment across the U.K.

Constellation Energy is primarily a nuclear generation company and the largest producer of carbon-free electricity in the U.S., serving states including New York, Illinois, Maryland, Pennsylvania and New Jersey. The company’s combined generation capacity is more than 32 GW and 90% of annual output is carbon free. Constellation’s share price traded down with a cool-off in the AI trade.

During the month, we initiated a position in Spanish electric utility Iberdrola. We also exited our positions in Portuguese renewables utility Energias de Portugal and Canadian energy infrastructure company Pembina Pipeline. 

All returns are in local currency.

Positioning and Outlook

While the current environment is marked by heightened volatility and uncertainty, we remain confident in our utility and infrastructure assets and their ability to generate defensive, consistent and growing cash flow streams for shareholders over the medium to long term. Another key benefit of infrastructure investing is the pass-through of inflation – approximately 90% of our portfolio continues to benefit from direct or indirect inflation pass-through mechanisms.

Currently, we remain somewhat defensively positioned with an emphasis on utilities. We continue to find the sector undervalued, as peak bond yields have resulted in multiples coming down in that space. Nevertheless, the utilities themselves have very strong growth profiles, particularly in the U.S., driven by AI data centre power demand, industry decarbonisation and resiliency spending (with recent quarterly reports continuing to affirm this). At the same time, European utilities are getting more capex approved by regulators and are seeing returns tick up as well, providing robust long-term visibility in earnings growth. With its defensive characteristics, we believe infrastructure is well-positioned to offer protection in slowing economic and uncertain market environments.