Developed Markets Income Strategy April Commentary

Key Takeaways

• Equities and infrastructure sold off in a risk-averse month of April as interest rate cuts were pushed out in the U.S. on stronger macro data and tighter employment.

• Among infrastructure sectors, U.S. electric utilities performed well on greater electricity demand expected to come from data centres, while higher bond yields weighed on communications infrastructure.

• That utilities performed well in the face of rising bond yields speaks to the strength of fundamental tailwinds such as electrification, renewables growth and more recently higher electricity demand from data centres.

Market Overview

Equities and infrastructure sold off in a risk-averse month of April. Interest rate cuts were pushed out in the U.S. on stronger macro data and tighter employment, and with the start of corporate earnings reporting season looking strong, no sign of slowdown was imminent.

Among infrastructure sectors, U.S. electric utilities performed well on greater electricity demand expected to come from data centres, as well as overall risk aversion in the market. Energy infrastructure in Canada performed well on expectations of greater infrastructure needs coming from buoyant oil and gas producer activity. Communications infrastructure underperformed, meanwhile, despite positive earnings releases, as U.S. Treasury yields moved up almost 50 basis points on stronger inflation. U.S. rails also gave back some of the recent strong share price gains along with the broader market and we saw softness in the transportation pricing environment given the overcapacity situation in trucks. European airports and toll roads underperformed amid strikes and lower traffic expectations for some airports, while possible risks to U.S. concessions affected European road exposures.

From a global infrastructure perspective, power prices in the U.S. and Europe continued to temper on weaker gas prices. Utilities are forecasting strong network growth driven by decarbonisation, replacement of aging infrastructure and resiliency spend. Data centre demand for electricity is expected to account for 50% of U.S. power demand in some regions of the U.S. by 2026. Geopolitical tensions and incentives put in place over the last three years, meanwhile, are leading to an increasing amount of near sourcing and onshoring in places like the U.S., which should further support spending for infrastructure.

Portfolio Highlights

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

On a sector basis, electric utilities (+0.61%) were the top contributors for month, with U.S. companies NextEra Energy (+0.24%) and Dominion (+0.17%) the lead performers. NextEra Energy (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. NextEra’s share price rallied during the month as it was a beneficiary of AI, along with a broader rotation into defensives.

Dominion’s core assets are its regulated electric and gas utilities in Virginia and South Carolina, where it services approximately four million customers. Following Dominion’s strategic update, investors have become increasingly confident the company will achieve their EPS targets, given the conservatism baked into their assumptions. The market also positively views the de-risking of their offshore wind platform, with 93% of costs fixed, all permits received, and a partnership secured through a 50% stake sale to Stonepeak. In the medium term, the market believes Dominion’s Virginia Electric business is positioned to benefit from increasing energy consumption from data centres/AI.

U.S. communications companies American Tower (-0.54%) and Crown Castle (-0.57%) 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 emerging markets (75,000 in India, 40,000 in Latin America and 18,000 in Africa).

Crown Castle is the leading independent owner and operator of wireless communications infrastructure in the U.S. with a portfolio of approximately 40,000 towers.

Shares underperformed as the market favoured more cyclical sectors, while tower stocks, being notably sensitive to interest rates, experienced further declines due to the uptick in bond yields. Additionally for American Tower, if the market is correct that we are nearing peak interest rates and the Fed is due to begin its easing cycle in the latter part of the year, we would expect that to be supportive of tower valuations. In the meantime, the company continues to grow top-line revenues as telco carrier customers roll out their 5G equipment on tower infrastructure.

During the month we used the opportunity to crystallise some gains by exiting our position in Australian toll road operator Transurban.

All returns are in local currency.

Positioning and Outlook

We remain generally balanced between more defensive regulated utilities and more GDP-sensitive infrastructure names. In April we saw defensive sectors such as utilities outperform even though interest rates continued to rise, indicating that persistently high rates are expected to impact the economy. That utilities performed well in the face of rising bond yields speaks to the strength of fundamental tailwinds such as electrification, renewables growth and more recently higher electricity demand from data centres. Stock selection opportunities in U.S. utilities continue to be plentiful, which could offset some relative macro pressures the sector is seeing.