Global Infrastructure Income Strategy 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 on the whole and economic resilient 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 might 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 regional basis, the U.S. and Canada (+0.15%) was the top contributor for month, with U.S. electric utility Entergy (+0.89%) and Canadian energy infrastructure company South Bow Corporation (+0.30%) 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.

South Bow is a North American liquids pipeline business that spun out of TC Energy in October 2024. It has over 4,900 km of pipeline, and its crown jewel asset, the Keystone Pipeline, connects the heavy crude produced in the Western Canadian Sedimentary Basin to the U.S. Gulf Coast, where key refinery markets are located. The company owns 7.6 mmbbl of liquids storage. South Bow was spun off at an elevated dividend yield of greater than 9%, which was attractive to yield investors in a falling-rate environment.

Portuguese renewables utility Energias de Portugal (‑0.41%) and U.S. renewables utility NextEra Energy Partners (-0.53%) 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 and initiated a new position in French toll road operator Vinci. We also exited our position in U.S. electric utility Public Services Enterprise Group.

All returns are in local currency.

Positioning and Outlook

We remain defensively positioned as impacts of tightened financial conditions continue to impact the economy and ultimately corporate earnings, but we have added some select GDP-sensitive exposure as an easing cycle now appears to be 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.