Emerging Markets 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.

• On a regional basis, Asia Pacific was the top contributor for the month, while Latin America detracted.

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

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 Performance

The ClearBridge Emerging Markets Strategy underperformed infrastructure benchmarks and global equities for the month.

On a regional basis, Asia Pacific (+1.71%) was the top contributor for the month, with Indian electric utilities Power Grid (+0.36%) a lead performer. Power Grid is India’s principal electric power transmission company. It has a share of more than 90% of India’s interstate and inter-regional electric power transmission system. Power Grid’s share price benefited from decarbonisation and electrification in India.

Latin America was the sole detracting sector (-1.03%), where Brazilian rail operator Rumo Logistica (-0.44%) and Brazilian toll road operator CCR (-0.47%) were the largest detractors for the month. Rumo Logistica, a vertically integrated rail company based in Brazil, primarily deals with agricultural volumes (corn, soybean and sugarcane), as well as intermodal (containers) and other bulk products. Rumo traded down amid lingering speculation that poor weather conditions could affect pricing for the 2025 crop. Additionally, the Brazilian market and infrastructure sector were weak as the expectation of higher interest rates for a longer period began to be priced in.

CCR is Brazil’s largest public infrastructure concession holder, operating concessions across motorways, urban mobility (sea ferries, subways, light rail) and airports. While CCR continues to deliver encouraging volumes, weakness in Brazil broadly due to higher-for-longer rate expectations weighed on shares.

During the month, we initiated a position in Chinese gas utility ENN Energy.

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. The Fed and many other central banks around the world have moderated in response to the inflation data. However, economic data has surprised to the upside this year and defensive sectors such as utilities continue struggle in this backdrop as a continuation of 2023. As a result, we are reviewing our positioning and increasing our cyclical exposure where it makes sense.