Emerging Markets Strategy November Commentary

Key Takeaways

• Strength in infrastructure was concentrated in the U.S., where GDP-sensitive energy infrastructure benefit from expectations of greater oil and gas production raising volumes for pipelines.

• Resilient economic data, potentially reflationary policy, such as tariffs from the Trump administration, and recent slight upticks in inflation have put some upward pressure on bond yields in recent weeks, causing some weakness in rate-sensitive sectors.

• We believe we are still seeing a catch-up of the gap between infrastructure earnings and total returns since 2022 and we believe the defensive characteristics of infrastructure will remain valuable in what we expect to be a more volatile market in the near-term.

Market Overview

Trump’s election win in the U.S., along with a Republican sweep of Congress, was widely applauded by the market. Specifically, the prospect of lower taxes and less regulation bolstered hopes for continued positive economic momentum, increased M&A activity and greater corporate profits. Positive investor reception to business-friendly nominees to key economic and financial positions in the new administration helped maintain the market rally through the month. 

Infrastructure also made positive gains, though more modest than broad equities. At the same time, resilient economic data, potentially reflationary policy, such as tariffs from the Trump administration, and recent slight upticks in inflation have put some upward pressure on bond yields in recent weeks. 

Emerging market equities generally retreated after Trump’s election win in the U.S. The Brazilian market weakened after the central bank hiked the benchmark interest rate again in early November. Investors also grew apprehensive about the sustainability of the Brazilian government’s fiscal strategies, particularly on the proposed tax exemptions and spending cuts, driving currency weakness. Meanwhile, fears of trade tariffs put some pressure on China after a strong month of performance driven by stimulus announcements. 

Portfolio Performance

The ClearBridge Emerging Markets Strategy slightly underperformed relevant infrastructure and global equities benchmarks during the month.  

On a sector-specific basis, airports (+0.38%) was the top contributor for the month, with Mexican operator Grupo Aeroportuario del Pacífico (+0.31%) and Indian operator GMR Airports (+0.17%) the lead performers.

Grupo Aeroportuario del Pacífico SAB de CV (GAP) is Mexico’s largest airport operator with a portfolio of 13 airports focused on Mexico’s pacific region and with an additional airport in Jamaica. GAP’s reported traffic was slightly ahead of expectations with a favourable mix impact driving higher commercial revenues.  

GMR Airports (GMR) is an India-based airport operator with operations across India, Philippines, Greece and Indonesia. GMR shares did well, rebounding from the previous month’s decline due to regulatory uncertainty and bolstered by the release of strong October traffic data. 
Indian electric utility National Thermal Power Corporation (-0.53%) and Indian energy infrastructure company Indraprastha Gas (-0.60%) were the largest detractors.  

National Thermal Power Corporation Limited (NTPC) is India’s largest power generation company, generating close to 19% of India’s power. NTPC has emerged as a diversified power major with presence in the entire value chain of the power generation business. The IPO of its renewable entity NTPC Green caused some capital outflow from the parent, weighing on shares.  

Indraprastha Gas Limited (IGL) is a city gas distribution business and one of India's leading natural gas distribution companies, processing and distributing compressed natural gas and liquified petroleum gas to transport, domestic, commercial and industrial consumers. The unexpected administrative price mechanism gas allocation cut, along with concerns over cost increases, impacted the share price of Indraprastha Gas. 
During the month, we exited our position in Brazilian toll road operator EcoRodovias.  

All returns are in local currency.

Positioning and Outlook

Looking ahead, we expect some volatility related to policy uncertainty, in particular as the year of global elections wraps up and given an uncertain forward path for bond yields. 
We believe we are still seeing a catch-up of the gap between infrastructure earnings and total returns since 2022 and we believe the defensive characteristics of infrastructure will remain valuable, driving the resilience of listed infrastructure performance relative to the broader markets, as experienced over November in certain emerging markets like China and Mexico.

Opportunities continue to be widespread across emerging market infrastructure. The market is still massively underestimating the growth in electricity demand driven by AI and data growth. Utilities with exposures to these strong themes look well positioned. For transport infrastructure, M&A and consolidation present catalysts in addition to organic growth.