Emerging Markets Strategy June Commentary

Key Takeaways

• Global 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

Global 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. Among emerging infrastructure markets, Asia Pacific Developing performed well, with Chinese markets rallying in May on what looks to be a bottoming market after a period of maximum pessimism. Tourism and consumption data looked solid and along with government support for the Chinese property sector helped the macro narrative. Concerns over political intervention on Petrobras and persistent inflation weighed on Brazil. Additionally, elections in Mexico and India dampened the respective market performances.

Portfolio Performance

The ClearBridge Emerging Markets Strategy outperformed infrastructure and global equities benchmarks during the quarter.

On a regional basis, Asia Pacific (+6.16%) was the top contributor for the quarter, with Indian electric utility Power Grid (+0.78%) and Chinese electric utility China Power International (+0.60%) the lead performers. Power Grid Corporation of India Ltd 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 rose during the quarter with renewed optimism in India, post the general election, along with overall strength in the equity market.

China Power International (CPI) is an independent power producer (IPP), operating c.30 GW of capacity in China, including 56% coal-fired, 20% hydro, and 23% wind, solar and others. Its holding company is State Power Investment Corporation, one of the top five Chinese state-owned power generator groups. Shares rose along with the rally in the Chinese equity market, which was driven by property loosening measures and encouraging holiday consumption data. Additionally, shares benefited from talks of power sector reform in China.

Indonesian toll road operator Jasa Marga (-0.50%) and Brazilian toll road operator CCR (-0.73%) were the largest detractors.

Jasa Marga is Indonesia’s largest toll road operator. The majority of its roads are located in Greater Jakarta, a highly populated area that provides the basis for high traffic volume on Jasa Marga’s toll roads. Weakness was mainly driven by Indonesian equity market pullback, which was driven by an increase in bond yields.

CCR is Brazil’s largest public infrastructure concession holder, operating concessions across motorways, urban mobility (sea ferries, subways, light rail) and airports. Fundamentally, CCR has been performing well with strong volumes and quarterly results. However, CCR traded down during the quarter as persistently high inflation combined with a weaker outlook for interest rates had a negative effect on long-duration stocks in Brazil.

During the quarter, we initiated a position in Indian airport operator GMR Airports Infrastructure and 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. Several emerging markets, particularly in Asia, have shown more decoupling with the U.S. rate cycle and should exhibit resilience against the narrative of U.S. rate cut delays. As a result, we are reviewing our positioning and increasing our cyclical exposure where it makes sense.