Global Infrastructure Income Strategy Commentary July

Key Takeaways

• July delivered a month of positive returns for most listed infrastructure sectors, trailing but participating well in the continued equity rally.

• Renewables was the standout sector in the month in our universe, driven by increased policy certainty as well as continued demand from hyperscalers for clean power to support the rapid growth of data centres.

• 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

Strong corporate earnings, easing trade tensions, economic resilience despite higher tariffs, and rising probability of rate cuts from the U.S. Fed, drove equities higher in July, with some preliminary trade deals for the U.S. with Europe and Japan helping risk appetite.

The U.S. and EU trade deal involves the EU pledging to buy $750 billion of energy (in U.S. dollars) from the U.S. over the next three years. This would include oil, gas and nuclear energy. While details are lacking and the deal is not yet binding, we believe this will offer a tailwind for U.S. energy infrastructure as another driver of increasing demand.

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, the U.S. and Canada (+1.36%) was the top contributor for the month, with U.S. electric utility Entergy (+0.40%) and U.S. renewables utility Brookfield Renewables Partners (+0.31%) the lead performers. Entergy is a regulated electric utility, providing services to approximately three million people in Arkansas, Louisiana, Texas and Mississippi. Entergy’s share price increased amid expectations of higher capex and sales growth in Arkansas, driven by accelerating economic development.

Brookfield Renewables Partners is a pure-play renewables operator and developer headquartered in Canada, focused on international hydro, solar, wind and storage technology. As more private and public institutions announce ambitious carbon reduction initiatives, Brookfield’s globally diversified, multi-technology renewables business makes it an attractive partner. Brookfield’s development pipeline stands at 18,000 MWs, providing confidence that the company can meet its targeted double-digit cash flow growth through to 2025. Brookfield’s share price responded to the hydro deal with Google, with power purchase agreement prices exceeding merchant market rates.

Spanish electric utility Redeia Corporacion (-0.15%) and Canadian rail operator Canadian National (-0.23%) were the largest detractors.

Redeia is engaged in the supply and transmission of electricity and is the sole high-voltage transmission agent and system operator in Spain. Redeia’s share price continued to be impacted by the potential impacts from the blackout, along with a lacklustre draft decision on transmission methodology.

Canadian National is the largest listed railroad in Canada. Its network is extensive, spanning over 20,000 miles across Canada, the U.S. and the Gulf of Mexico. Canadian National’s share price was down in July as the company was forced to lower their guidance, citing future disruptions and delays in operational improvements.

During the month, we initiated a position in Spanish electric utility Iberdrola.

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.