Developed Markets Income Strategy June Commentary

Key Takeaways

• Infrastructure and global equities rose in the second quarter, with infrastructure trailing global equities modestly as strength in the utilities sector faded late in the quarter.

• Growing power demand from data centres supporting AI was a positive for both utilities and energy infrastructure in the quarter.

• We remain defensively positioned as impacts of tightened financial conditions are expected to impact the economy and ultimately corporate earnings.

Market Overview

Infrastructure and global equities rose in the second quarter, with infrastructure trailing global equities modestly as strength in the utilities sector faded late in the quarter despite a moderation in bond yields. Overall, investors began to appreciate the growing power demand from data centres supporting AI. This was positive for electric utilities, as well as for energy infrastructure, which also benefited from an improving natural gas price outlook and growing acknowledgment midstream infrastructure plays a key role to back up renewable power as AI demand grows. Airports were weaker, by contrast, amid lower summer traffic expectations for some European airports, while a mix of coal haulage, fuel headwinds and a loose truck market placing pressure on tariff increases for the rails weighed on that sector.

By region the U.S. and Canada performed well, with returns centred around the abovementioned drivers for electric utilities and energy infrastructure, while concerns over possible government intervention in Brazil weighed on performance in Latin America. Japan’s rail traffic recovery plateaued and looked to settle on a new normal, meanwhile, dragging down Asia Pacific Developed.

Portfolio Highlights

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

On a stock-specific basis, U.K. electric utility National Grid (+0.15%) was the top contributor for month. National Grid is one of the world’s largest publicly owned utilities focused on transmission and distribution activities in electricity and gas. National Grid’s share price benefited from a bounce from the rights issue sell off the previous month.

Spanish electric utility Redeia Corporacion (RED) (+0.07%) also contributed to monthly performance. RED is engaged in the supply and transmission of electricity and is the sole high-voltage transmission agent and system operator in Spain. RED’s share price rose in anticipation of improving regulatory returns.

U.S. renewables utility NextEra Energy Partners (NEP) (-0.59%) and U.S. electric utility NextEra Energy (NextEra) (-0.62%) were the largest detractors.

NEP is a growth-oriented contracted renewables company formed by its sponsor and general partner NextEra to own, operate and acquire contracted renewable energy generation assets located in North America.

NextEra is an integrated utility business with a regulated utility operating in Florida and is the largest wind business in the U.S. NextEra’s regulated business, including Florida Power & Light, serves nine million people in the State of Florida.

Both NEP and NextEra’s share price was impacted by the lack of positive announcements from the NextEra Analyst Day.

All returns are in local currency.

Positioning and Outlook

We remain defensively positioned as impacts of tightened financial conditions are expected to impact the economy and ultimately corporate earnings. Inflation has been trending down thanks to the cooling off in areas such as wage inflation and rents, leading to increasing confidence by market participants that we are at the end of the rate hiking cycle and now looking toward the start of the rate-cutting cycle. We believe this could be the start of the turn for many of our long-duration assets such as towers and renewables. Utilities should continue to benefit from themes of electrification, renewables growth and more recently higher electricity demand from data centres, and we remain constructive on the sector, given reduced valuations.