Infrastructure Insights Portfolio Insights

Infrastructure Value 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 a balanced portfolio of both defensive utilities and more GDP sensitive infrastructure.
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.

Portfolio Highlights

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

On a regional basis, Western Europe (+0.25%) was the top contributor for month, with Spanish toll road operator Ferrovial (+0.32%) and French airport operator Aeroports de Paris (+0.17%) the lead performers. Ferrovial operates and develops toll road concessions and airports globally. Ferrovial’s toll road asset in Toronto, the 407 ETR, announced a 15% increase in tariffs beginning in 2024, after a multiyear pause during COVID. The increase was better than what the market was expecting and derails the bear thesis around the asset being structurally impaired due to work-from-home trends.

Aeroports de Paris (ADP) owns and operates three airports in Paris, including Charles de Gaulle (CDG), Orly and Le Bourget, as well as minority stakes in several global airport groups, including TAV in Turkey and Schiphol in Holland. The regulator approved a 4.5% aeronautical tariff increase, which is 100% of ADP’s ask. Breaking that down, 3.0% of the increase will offset some of the tax increases introduced by the government, while 1.5% will go toward inflation. There have been some concerns by the market around degradation of regulation in France and the risk of changes to the dual-till model, so the tariff increase without pushback is an important signalling event.

U.S. communications company American Tower (-0.42%) and Portuguese renewables utility Energias de Portugal (-0.38%) were the largest detractors. American Tower is a leading independent owner, operator and developer of wireless and broadcast communications infrastructure. The company has 41,000 sites in the U.S. and a further 139,000 sites across 19 countries, predominantly in emerging markets (75,000 in India, 40,000 in Latin America and 18,000 in Africa). American Tower underperformed after inflation and interest rates concerns caused investors to shift away from rate-sensitive defensive stocks.

Energias de Portugal (EDP) is an integrated utility based on the Iberian Peninsula, operating electricity distribution, generation and energy supply businesses. It has a growing exposure to global renewables through its 83% owned subsidiary EDPR, which primarily consists of onshore wind farms. EDP also operates electricity distribution and generation businesses in Brazil. EDP shares were weaker amid the renewables sector being out of favour, particularly in the context of the softer electricity pricing environment. We believe the market is underappreciating EDP’s integrated business model, where softer wholesale electricity pricing is a tailwind for its supply business due to lower input costs.

During the month we used the opportunity to crystallise some gains by exiting our position in U.S. electric utility PPL Corporation.

All returns are in local currency.

Positioning and Outlook

We are maintaining a balanced portfolio of both defensive utilities and more GDP-sensitive infrastructure. 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, while GDP-sensitive infrastructure will benefit from steadying or strengthening economic data.

We think utilities valuations, like infrastructure broadly, are attractive now, and an environment of slower but positive growth should be favourable to yield-sensitive assets.

Share:
 
Share:
 

Related Perspectives

Infrastructure Insights Portfolio Insights
Developed Markets Income Strategy January Commentary

Developed Markets Income Strategy January Commentary

Amid a tug of war between economic optimism and monetary policy uncertainty, equity markets generated positive gains in January.

Read full article