Global Infrastructure Value 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.

• Utilities, renewables and communication towers performed well in our listed infrastructure universe, while European utilities were weaker.

• 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 lagged global equities, though performed in line with relevant infrastructure benchmarks for the month.

On a regional basis, the U.S. and Canada (+1.19%) was the top contributor for the month, with U.S. electric utility Entergy (+0.38%) and U.S. rail operator CSX (+0.24%) the lead performers. Entergy is a pure regulated electric utility, providing services to approximately three million people in Arkansas, Louisiana, Texas, Mississippi and New Orleans. Entergy’s share price increased amid expectations of higher capex and sales growth in Arkansas, driven by accelerating economic development.

CSX operates the second-largest listed U.S.-centric railroad in terms of market cap operating in the East Coast. The company owns over 20,000 miles of track and operates across 23 states. CSX’s share price rose in July due to a strong quarterly result along with M&A speculation from West Coast railroad BNSF.

U.K. water company Severn Trent (-0.17%) and Canadian rail operator Canadian National (-0.26%) were the largest detractors.

Severn Trent (SVT) is a regulated U.K. water utility that provides water and wastewater services to the Midlands and Wales, serving over 4.5 million households and businesses. Severn Trent’s share price declined in line with broader weakness across the U.K. utilities sector. We note that the government is processing regulatory reform proposals made by the ‘Cunliffe review’ process, which recommended more competitive allowed returns and the restructuring of the regulatory body, Ofwat.

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 lowered their guidance, citing future disruptions and impacts from tariffs. We continue to stress test our medium-term base case earnings expectations and model out bull and bear case scenarios. At this stage, we believe our base case is achievable and reaffirm our investment thesis.

During the month we exited our positions in Brazilian electric utility Eletrobras and U.K. water company United Utilities to fund more compelling investment opportunities where our conviction in the thesis has increased.

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.