Emerging Markets Strategy April Commentary

Key Takeaways

• Infrastructure outperformed global equities in April as the U.S. levied tariffs on most of its trading partners, causing a sharp spike in volatility.

• Utilities service domestic catchments with electricity, gas and water, and are not directly exposed to international trade.

• Emerging markets meaningfully outperformed developed markets over the month, which was mainly led by Brazil and Mexico, accompanied by recovery in China and India.

• 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.

Market Overview

Infrastructure outperformed global equities in April as the U.S. levied tariffs on most of its trading partners, causing a sharp spike in volatility. Many tariffs were lowered or delayed by month-end, although retaliatory tariffs and elevated trade uncertainty continued to weigh on sentiment. Against this backdrop, the listed infrastructure asset class exhibited defensiveness and provided downside protection for investors. The potential for tariffs to crimp international trade, raise costs for businesses and consumers and slow economic growth broadly, resulting in a recession, helped the more defensive regulated utilities sector outperform in April, in particular in Europe and Canada. Easing inflation in the U.K. helped water utilities there perform well. Utilities service domestic catchments with electricity, gas and water, and are not directly exposed to international trade.

Slowing GDP in the U.S. and elevated recession concerns drove negative performance for the U.S., whereas Europe showed gains driven by fiscal stimulus and improving economic indicators. Emerging markets were volatile given trade tariff headlines but ended up higher over the month.

China retaliated against the U.S. tariffs and reiterated easing and supportive measures to mitigate the impact on the economy, while countries like India, Brazil and Mexico are ready for negotiations. Compared to Trump’s first term, most countries are better prepared for trade tensions with a more globally diversified supply chain and trade relations.

In Brazil interest rate sensitive utilities and infrastructure rallied on the back of strengthened expectations of the country close to the end of a tightening cycle, as political expectations recovered.

Mexican airports held up well against the local market as they were seen as a less affected sector to trade tensions with the U.S.

Portfolio Performance

The ClearBridge Emerging Markets Strategy outperformed relevant infrastructure and global equities benchmarks during the month.

On a regional basis, Latin America (+3.81%) was the top contributor for the month, with Brazilian electric utility Equatorial Energia (+0.74%) and Brazilian water company Sabesp (+0.66%) the lead performers. Equatorial Energia (EQTL) is a Brazilian electric power company that distributes electricity in the Northeast states of Para and Maranhão in Brazil. Equatorial performed strongly during April as Brazil continued to see a rally on the back of improved political expectations. Additionally, EQTL is expected to participate in upcoming sanitation auctions where competition is expected to be very low.

Sabesp is the largest regulated water utility company in Latin America and caters to a client base of approximately 26.7 million customers. Based in São Paulo, Sabesp was recently privatised with top-tier operator Equatorial emerging as the acquirer. Under Equatorial’s management, significant improvements in efficiency are expected. Sabesp was a strong performer in April as Brazil continued to see a rally on the back of improved political expectations. Additionally, Sabesp continues to execute their turnaround and is successfully delivering.

Indian energy infrastructure company Indraprastha Gas (-0.21%) and Chinese port operator Qingdao Port International (-0.25%) were the largest detractors.

Indraprastha Gas Limited (IGL) is a city gas distribution business. It is one of India’s leading natural gas distribution companies, processing and distributing compressed natural gas and liquified petroleum gas to transport, domestic, commercial and industrial consumers. IGL’s share price fell due to a new draft of an EV policy in Delhi that may cause a significant gas sales volume overhang for the company.

Qingdao Port operates the Port of Qingdao, one of China’s top 5 ports by throughput and a key trade hub in northeast China. It handles over 600 million tonnes of cargo and 25 million TEUs of containers annually. Qingdao Port’s share price was impacted on concerns around the U.S.-China trade war from escalated tariffs from both countries.

During the month, we initiated positions in Brazilian electric utility Copel and Chinese gas utility Kunlun Energy. We also used the opportunity to crystallise some gains by exiting our positions in Chinese gas utility ENN Energy, Brazilian toll road operator CCR and Indian gas utilities Gujarat Gas and Indraprastha Gas.

All returns are in local currency.

Positioning & 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.