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Emerging Markets 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. Chinese equities retreated mainly on geopolitical risks from the U.S.

Portfolio Performance

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

On a regional basis, Asia Pacific (+1.34%) was the top contributor for the month, with Indian energy infrastructure company Mahanagar Gas (+0.82%) and Indian electric utility Power Grid (+0.33%) the lead performers. Mahanagar Gas is a natural gas distribution company that supplies compressed natural gas (CNG) for motor vehicle use and piped natural gas (PNG) for domestic, commercial and industrial use in Mumbai and adjoining areas. Continued strength in CNG volumes helped Mahanagar’s share price.

Gujarat Gas (GUJGA) is a city gas distribution business. It is one of India's leading natural gas distribution companies, processing and distributing compressed natural gas and liquefied petroleum gas to transport, domestic, commercial and industrial consumers. Shares of GUJGA rose in a lower LNG price environment.

Chinese gas utility China Resources Gas (-0.56%) and Brazilian toll road operator CCR (-0.32%) were the largest detractors for the month. China Resources Gas is a gas distribution utility in China whose core business is downstream last-mile city gas distribution, having over 260 projects across the country. It is substantially owned by China Resources Holdings, one of the largest SOE conglomerates in China. Shares were dragged by the overall sharp correction in the Chinese H-share market, in turn driven by concerns around geopolitics, economic growth and the property market.

CCR is Brazil’s largest public infrastructure concession holder, operating concessions across motorways, urban mobility (sea ferries, subways, light rail) and airports. CCR was slightly weaker in the month of January due to general weakness in the Brazilian market (down ~4%). However, we note that CCR’s traffic has been exceptionally strong and expect encouraging quarterly results.

During the month, we initiated a position in Chinese airport operator Guangzhou Baiyan International Airport and Chinese electric utility China National Nuclear Power. We also exited our position in Chinese renewables utility China Longyuan Power.

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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