Infrastructure Value Strategy October Commentary

Key Takeaways

• Infrastructure indexes and global equities both traded down in October as expectations grew that interest rates would remain higher for longer than previously expected.

• UK water companies performed well in October as 2025-2030 business plans were well received and optimism grew that allowed returns would be higher than previously indicated, given higher bond yields.

• We think utilities valuations, like infrastructure broadly, are attractive now, and, versus the more optimistic consensus narrative, our contrarian view is that the risks of a recession remain considerable.

Market Overview

Infrastructure indexes and global equities both traded down in October as expectations grew that interest rates would remain higher for longer than previously expected.

Slowing inflation and reasonably strong economic data have led investors to reassess their expectations of a recession in 2023. China, meanwhile, is experiencing economic challenges as progress in its reopening is being disrupted by difficulties in the Chinese property sector.

Inflation continues to moderate, although concern remains around the level of wage inflation and more recently a surge in oil and gas prices, making it difficult for central banks to loosen policy quickly. As expectations for a higher-for-longer interest rate backdrop gain traction, financial conditions continue to tighten, placing further stress on economic growth. Consensus continues to moderate its expectations for a recession, with the possibility of a recession remaining the largest risk to investors.

Portfolio Highlights

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

On a regional basis, the U.S. and Canada (+1.37%) was the top contributor for October, with U.S. communications company American Tower (+0.35%) the lead performer. 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). Shares did well on the back of stronger than expected results, with management increasing guidance as a result.

Turning to Western Europe, the U. water sector recovered after robust regulatory capital value growth ambitions shown in the proposed AMP8 business plans (2025-2030) met with high acceptance by customers, recognising needs for bill increases. This, coupled with more certainty that allowed returns by Ofwat in PR24 would be likely higher than the Final Methodology released last year, given increased bond yields, helped the sector. Additionally, political scrutiny on the sector receded somewhat, with the AMP8 business plans meeting little negative press. UK water companies Severn Trent (+0.59%) and United Utilities (+0.29%) were among top individual contributors for the month. Severn Trent also benefited from the clearing of an overhang through a successful equity placement.

Australian toll road operator Transurban (-0.21%) and Spanish communications company Cellnex (-0.51%) were the largest detractors. Transurban owns a suite of intra-urban toll road assets that dominate the Australian toll road network in the three state capital cities on the Eastern Seaboard. Additionally, it has several toll roads in North America, predominantly in the Washington D.C. area. Transurban has a high inverse correlation with Australian interest rates and was negatively impacted by the yield increase during the month.

Cellnex is Europe’s leading independent infrastructure owner and operator for wireless telecommunication. Cellnex’s share price was pressured by rising bond yields as well fears of tower rationalization in the event of a telco consolidation.

During the month we initiated a position in Spanish electric utility Redeia, where we believe, over the medium term, regulatory support for greater investments in the energy transition will translate to more favourable regulatory treatment for Redeia, compared to the previous five-year regulatory cycle, where investments levels were comparatively more modest. We closed positions in Australian toll road operator Atlas Arteria and Spanish communications company Cellnex to fund other investment ideas where we see more attractive risk-reward profiles.

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 (we are starting to see weakness in earnings from higher interest costs). The Fed and other central banks around the world have to maintain their hawkish position and have started to accept recessionary risks as increasingly likely but necessary to combat the stubbornly high inflation.

Our overarching view is that utilities can handle higher interest rates in the intermediate term. 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, versus the more optimistic consensus narrative, our contrarian view is that the risks of a recession remain considerable.