Global Infrastructure Income Strategy December Commentary

Key Takeaways

• Global markets finished the year mixed in the fourth quarter, following the U.S. presidential election and a third interest rate cut for the year. That said, continued strong economic data began to support the case for a slower easing cycle than had been expected, leading infrastructure to trade down.

• Infrastructure sectors were led by gas utilities and energy infrastructure pipelines, beneficiaries of data centre growth and Trump’s election win, while renewables and communication towers sold off.

• The Strategy is tilted somewhat defensively, toward utilities, though not purely for reasons of defense, as peak bond yields have left utilities undervalued and with very strong growth profiles, particularly in the U.S., driven by AI data centre power demand, industry decarbonisation and resiliency spending.

Market Overview

Infrastructure traded down in the fourth quarter following the U.S. presidential election and a third interest rate cut for the year. Strong economic data saw the case for a slower easing cycle from the Federal Reserve than had been expected. This, along with potentially reflationary policy from the Trump administration, such as tariffs, as well as slight upticks in inflation, put some upward pressure on interest rates, causing some market weakness. U.S. equities, in particular growth segments, made gains, while global indexes were generally weaker, as were income-oriented and rate-sensitive sectors across the board.

Infrastructure sectors were led by gas utilities and energy infrastructure pipelines, which have performed well amidst the growth of power demand from AI data centres, the trend of converting coal-fired plants to gas for electricity generation, strong LNG exports and manufacturing reshoring, which increases demand for LNG production. Trump’s U.S. election win in November also supported optimism for the sector, given his positive stance towards fossil fuels and reducing red tape.

Trump’s victory put into question the fundamentals of renewables businesses, causing weakness in that sector. In addition, the prospect of interest rates remaining elevated further pressured renewables as well as rate-sensitive communication towers.

Portfolio Highlights

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

On a sector-specific basis, gas utilities (+0.53%) were the top contributors for quarter, with Canadian companies TC Energy (+0.43%) and Enbridge (+0.37%) the lead performers. TC Energy (TC) is a North American company managing over 93,300 km of natural gas pipelines and 4.3 GW of power assets. Nearly 100% of TC’s cash flows are backed by stable long-term contracts and cost-of-service tolling with creditworthy counterparties. Enbridge owns and operates one of the largest oil and gas pipeline networks in North America. The company also owns regulated gas distribution utilities in Ontario, Canada.

TC Energy and Enbridge have been beneficiaries of the theme of growing power and energy needs in the context of AI data centre growth, coal-to-gas switching, LNG exports, manufacturing reshoring and Trump’s victory in the U.S. presidential election.

Portuguese renewables utility Energias de Portugal (‑0.85%) and U.S. communications company Crown Castle (-0.91%) 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. Trump’s victory putting into question the fundamentals of renewables businesses impacted EDP negatively.

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. Crown Castle shares declined following the U.S. election, as the market perceived it as a relative loser in the wake of Trump’s victory. Trump’s policies are also viewed as potentially inflationary, leading to a spike in bond yields, which is particularly impactful for towers given their sensitivity to interest rates.

During the quarter, we initiated positions in U.S. energy infrastructure company ONEOK, Canadian energy infrastructure company South Bow, Australian gas utility APA Group and French toll road operator Vinci. We also exited our positions in Spanish gas utility Enagas, Brazilian toll road operator CCR, U.S. electric utility Public Services Enterprise Group and Spanish electric utility Iberdrola.

All returns are in local currency.

Positioning and Outlook

We expect robust global growth (albeit slowing) in 2025, in particular in the U.S., with moderating inflation through the first part of the year. Uncertainty surrounding Trump policies will affect both the economic and market outlook for the year, however. We have the ability within our portfolios to tilt toward more defensive positioning through our exposures to regulated and contracted utilities, or to take on some more economic sensitivity through exposure to GDP growth and the business cycle, through energy infrastructure, airports, rail and toll roads, for example. Today we are tilted somewhat defensively, toward utilities, though not purely for reasons of defense. We find utilities undervalued at present, as peak bond yields have resulted in multiples coming down in that space, although the utilities themselves have very strong growth profiles, particularly in the U.S., driven by AI data centre power demand, industry decarbonisation and resiliency spending. At the same time, European utilities with transmission businesses are getting additional capital expenditure approved by their regulators and are seeing returns tick up as well. We believe there is some upside there, as well as in U.K. water, where the recent final regulatory decision was supportive for investments over the next five years.