Developed Markets Infrastructure Income Model October Commentary

Key Takeaways

• Listed infrastructure outpaced global equities in October.

• Higher bond yields pressured rate-sensitive sectors such as renewables and communications, while energy infrastructure performed well, driven by the need to ensure power grid stability and meet growing energy demand from a variety of sources, such as AI and data centres.

• Given the prospect of slowing growth from elevated levels as well as declining interest rates, we believe the defensive and income-producing qualities of infrastructure will become more apparent, as was evident in the third quarter.

Market Overview

Listed infrastructure outpaced global equities in October. Risk assets across the board were lower for the month as large tech company earnings disappointed overall and economic resilience and strong labour data supported the case for higher bond yields.

From a sector perspective, higher bond yields pressured rate-sensitive sectors such as renewables and communications, while raised expectations of a Trump win in the U.S. presidential election, which may lead to a repeal of, or changes to, the Inflation Reduction Act, also weighed on renewables. Meanwhile, carrier activity is looking healthy for communication tower companies.

Investors remained positive on the growth outlook for energy infrastructure, which performed well, driven by the need to ensure power grid stability and meet growing energy demand from a variety of sources, such as AI and data centres. Weak underlying growth continued to weigh on U.S. rails. Uncertainties around the upcoming regulatory reset for U.K. water companies weighed on the sector.

Portfolio Highlights

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

On a stock specific basis, U.S. electric utility Entergy (+1.00%) and Canadian gas utility TC Energy (+0.26%) were the lead performers. Entergy is a regulated electric utility, providing services to approximately three million people in Arkansas, Louisiana, Texas, Mississippi and New Orleans. Entergy’s share price rose as the company reported strong third quarter results, and raised their guidance on their forward growth outlook. The company is seeing higher energy demand driven by a number of factors, including AI/data centre related power needs, and is looking to add incremental gas-fired generation capacity to service this higher demand outlook.

TC Energy is a North American energy infrastructure company managing over 93,300 km of natural gas pipelines, 4,900 km of liquids pipelines and 4.3 GW of power assets. Nearly 100% of its cash flows are backed by stable long-term contracts and cost-of-service tolling with creditworthy counterparties. TC Energy’s spinoff of its liquids pipelines business South Bow was a catalyst to reposition TC Energy as a pureplay natural gas pipeline and nuclear power company. TC Energy’s natural gas pipeline footprint is positioned to benefit from a number of secular growth drivers, including growing LNG exports, coal-to-gas switching, nearshoring and manufacturing growth, and now, data centre/AI-related power demand.

Portuguese renewables utility Energias de Portugal (‑0.43%) and U.S. renewables utility NextEra Energy Partners (-0.55%) were the largest detractors.

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, primarily onshore wind farms, through its 83% owned subsidiary EDPR. EDP also operates electricity distribution and generation businesses in Brazil. The increased likelihood of a Trump victory in the U.S. elections drove a selloff among renewables stocks due to a fear the Inflation Reduction Act would be repealed, which impacted EDP’s share price.

NextEra Energy Partners (NEP) is a growth-oriented contracted renewables company formed by its sponsor and general partner NextEra Energy to own, operate and acquire contracted renewable energy generation assets located in North America. NEP’s share price fell due to negative commentary regarding potential changes to its capital allocation policy as well as negative sentiment for renewables amid a surge for Trump in U.S. election polls.

During the month, we received and retained a position in Canadian energy infrastructure company South Bow following its spinoff from holding TC Energy. We also exited our position in U.S. electric utility Public Services Enterprise Group.

All returns are in local currency.

Positioning and Outlook

Whist we remain defensively positioned we have added some select GDP-sensitive exposure as the global easing cycle is now underway. We are expecting bond volatility to reduce and market breadth to continue to broaden — as that occurs, we expect that the market will increasingly recognise the strong fundamentals and long-term themes of infrastructure. 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 the prospect of slowing growth from elevated levels as well as declining interest rates, we believe the defensive and income-producing qualities of infrastructure will become more apparent, as was evident in the third quarter.