Developed Markets Infrastructure Income Model May Commentary

Key Takeaways

• Listed infrastructure delivered strong absolute gains in May, participating well in a global equity rally in a month in which a series of trade deals and de-escalations in U.S. trade policy drove a more positive sentiment for growth and risk assets.

• Among listed infrastructure, a brighter trade outlook helped GDP-sensitive infrastructure such as airports, rails and toll roads outperform.

• Tariffs are unlikely to have a meaningful impact on utility earnings given they service domestic catchments with electricity, gas and water, and are not directly exposed to international trade.

Market Overview

Listed infrastructure delivered strong absolute gains in May, participating well in a global equity rally in a month in which a series of trade deals and de-escalations in U.S. trade policy drove a more positive sentiment for growth and risk assets.

A string of bilateral deals with the U.S.’s biggest trading partners, a de-escalation in reciprocal tariffs by both the U.S. and China and a federal trade court ruling pausing President Trump’s most sweeping tariffs boosted markets in general. Among listed infrastructure, this helped GDP-sensitive infrastructure such as airports, rails and toll roads to outperform. Airports were strong mostly across the board, while U.S. rails where higher on hopes that reductions in trade barriers would help a volume recovery.

The bond market fared worse than equities as skepticism over the president’s multitrillion dollar fiscal package and the downgrading of U.S. debt from its triple A rating by Moody’s sparked a nearly quarter point rise in U.S. Treasury yields. This weighed on communications towers, which also saw some idiosyncratic weakness amid a dividend cut for one company in the sector.

Performance for utilities was mixed, with North American utilities largely flat as bond yields edged up and investors embraced riskier equities, while European utilities continued to deliver strong returns, helped by fiscal stimulus and continued robust long-term visibility in earnings growth. Further, sentiment for U.S. renewables was weaker following the proposed faster phase-out of renewables tax credits in Trump’s tax bill.

On a regional level, China was strong as the tariff picture improved, Japan was a little lower as Japanese rail companies digested recent gains, while Latin America continued to show strength.

Portfolio Highlights

Our global listed infrastructure strategies underperformed global equities, though performed in line with relevant infrastructure benchmarks for the month.

On a regional basis, Western Europe (+1.27%) was the top contributor for the month, with Italian electric utility Enel (+0.23%) the lead performer. Enel is an integrated utility headquartered in Italy operating primarily renewable generation and regulated distribution assets across Europe, Latin America and the U.S. During the month, Enel reported their quarterly results which were seen as positive.

Turning to North America, U.S. electric utility Constellation Energy (+0.71%) also performed well.

Constellation Energy (Constellation) is primarily a nuclear generation company and is 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. During the month, Constellation announced an accretive deal with Meta, which should see the company enhance its capacity in Illinois by 30 MW.

U.S. electric utility OGE Energy (-0.07%) and U.S. communications company Crown Castle (-0.20%) were the largest detractors.

Oklahoma Gas and Electric (OGE) operates the largest utility business in Oklahoma, U.S. OGE’s share price declined with analyst downgrades and earnings revisions.

Crown Castle is the leading independent owner and operator of wireless communications infrastructure in the U.S. with a portfolio of approximately 40,000 towers. Crown’s share price fell in May as rising government yields pressured REIT valuations. The dividend cut, although well telegraphed, also likely weighed on sentiment.

During the month, we initiated a position Canadian rail operator Canadian National. We also exited our position in German airport operator Fraport.

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, toward utilities. We find the sector as undervalued at present, as peak bond yields have resulted in multiples coming down in that space, although 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. 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.

Lastly, in terms of tariffs, regulated utilities (the bulk of the portfolio) are largely insulated. Tariffs are unlikely to have a meaningful impact on utility earnings given they service domestic catchments with electricity, gas and water, and are not directly exposed to international trade.