Infrastructure Insights Portfolio Insights

Emerging Markets Strategy February Commentary

Key Takeaways
  • Strength in Asian equities helped bolster emerging markets infrastructure stocks in February, as they mostly outperformed their western counterparts.
  • Electric, toll roads and ports were the top contributors to performance for the month, while rail and renewables were laggards.
  • 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

Strength in Asian equity markets helped bolster emerging markets infrastructure stocks in February, as they mostly outperformed their western counterparts with raised hopes for monetary easing there.

Electric, toll roads and ports were the top contributors to performance for the month, while rail and renewables were laggards. On a regional basis, Africa was the main detractor, where a sole holding in the communications sector underperformed.

Portfolio Performance

The ClearBridge Infrastructure Emerging Markets Strategy outperformed infrastructure benchmarks and global equities for the month.

On a regional basis, Asia Pacific (+3.59%) was the top contributor for the month, with Philippines-based port operator International Container Terminal Services (+0.78%) and Indonesian toll road operator Jasa Marga (+0.42%) the lead performers. International Container Terminal Services (ICTS) operates terminals through long-term concession agreements with local port authorities and governments. Shares in ICTS rallied during the month on the back of a strong volume outlook and a new contract win in its home market.

Jasa Marga is Indonesia’s largest toll road operator. The majority of its roads are located in Greater Jakarta, a highly populated area that provides the basis for high traffic volume on Jasa Marga’s toll roads. Jasa Marga’s share price rose on the back of its newly completed toll road and a better-than-expected toll increase, along with the announcement of positive financial guidance.

Brazilian electric utility Equatorial Energia (-0.19%) and African communications company IHS Holding (-0.30%) were the largest detractors for the month. Equatorial Energia (EQTL) is a Brazil-based electric power company that distributes electricity in the Northeast states of Para and Maranhão in Brazil. EQTL was weaker in February as blackouts caused by the hot and windy weather led to the government postponing distribution concession renewals. Going forward the government is looking to add additional terms to concession renewals, which may include more stringent service requirements in the case of future blackouts.

IHS is a leading independent owner, operator and developer of wireless and broadcast communications infrastructure. The company has 30,500 sites across three continents, with the majority in Nigeria (16,600 sites) and Brazil (4,500 sites) and the bulk of the remainder located throughout Africa (7,900 sites). IHS shares underperformed after the Nigerian currency was significantly devalued, resulting in headwinds to USD-denominated earnings.

During the month, we used the opportunity to crystallise some gains by exiting our position in Brazilian electric utility Auren Energia.

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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