Global Infrastructure Value Strategy January Commentary

Key Takeaways

• Infrastructure made solid gains in January, trailing global equities, which largely shook off the escalating trade and policy uncertainty that has come with the first weeks of U.S. President Trump’s second term.

• On a regional basis, Latin America saw a rebound amid hopes that President Lula would exercise more fiscal discipline, while China was somewhat weaker as warmer weather weighed on natural gas utilities there.

• 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 made solid gains in January, trailing global equities, which largely shook off the escalating trade and policy uncertainty that has come with the first weeks of U.S. President Trump’s second term.

On a sector basis, GDP-sensitive North American rails and European toll roads performed well. Among North American rails, volumes remain solid and expectations continue for a recovery in pricing later in the year.

Enthusiasm for data centre buildouts continued to support utilities, in particular in the U.S. However, we saw some concerns emerge during the month relating to the development of a cheaper and more efficient AI model from China – DeepSeek. While we are still assessing the ultimate implications of DeepSeek, we think any moderation in energy demand from AI and data centres due to potentially more efficient AI models will likely be minor and temporary, and we see no change in business prospects for companies serving the world’s growing power needs. These continue to be driven by strong trends such as industry decarbonisation, resiliency spending and onshoring. Among utilities in January, we also saw some bifurcation between those U.S. utilities with Eastern and Southern U.S. exposure, which performed well, and California utilities, which traded down on concerns over potential wildfire liabilities. While the strategy owns PG&E, which operates in Northern California and have not been directly impacted by the fires in Southern California, we have reduced and risk managed our position in recognition of the increased risk of exhausting the wildfire fund if Edison International, who have been impacted by the fires, is found liable for the fires. We will continue to monitor and assess the situation and take action where necessary.

The main negative performers in the month were renewables, which have come under pressure as Trump’s victory has put into question the fundamentals of renewables businesses and potentially higher-for-longer interest rates are pressuring longer-duration stocks.

On a regional basis, Latin America saw a rebound amidst hopes that President Lula would exercise more fiscal discipline, while China was somewhat weaker as warmer weather weighed on natural gas utilities there.

Portfolio Highlights

Our global listed infrastructure strategies underperformed global equities, though performed in line with relevant infrastructure benchmarks for the month.

On a regional basis, the U.S. and Canada (+1.12%) was the top contributor for the month, with U.S. electric utilities Constellation Energy (+0.88%) and Entergy (+0.36%) the lead performers. Constellation Energy (Constellation) is primarily a nuclear generation company and is the largest producer of carbon-free electricity in the U.S., serving states including New York, Illinois, Maryland, Pennsylvania and New Jersey. The company’s combined generation capacity is more than 32 GW and 90% of annual output is carbon free. Constellation’s share price rose during the month with the highly accretive Calpine acquisition. The Calpine deal gives Constellation access to a gas generation fleet in the fast-growing Texas market, where Constellation does not have a meaningful presence. We see prospects for Constellation to strike data centre deals with these assets, similar to the Microsoft deal on its nuclear assets, which was announced in September 2024.

Entergy is a pure regulated electric utility, providing services to approximately three million people in Arkansas, Louisiana, Texas and Mississippi. Load growth around the Gulf Coast continued to be robust during the month, helping sentiment, while Entergy’s generation business is also a potential winner amid data centre buildouts. In late 2024, Entergy announced a deal with META, where META would build data centres in Louisiana, and Entergy would construct new gas-fired plants to power META’s facilities. For Entergy, this translated to an upgrade to the investment and earnings outlook for the company.

Canadian gas utility TC Energy (-0.11%) and U.S. electric utility PG&E Corporation (-1.05%) were the largest detractors. 

TC Energy 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 Energy’s cash flows are backed by stable long-term contracts and cost-of-service tolling with creditworthy counterparties. Following strong share price performance in 2024, TC Energy, along with the broader energy complex, gave back some gains on the announcement that a cheaper and more efficient AI model has been developed in China (DeepSeek). This catalysed concerns around the longer-term energy needs for the development of AI/data centres. While we are still assessing the ultimate implications of DeepSeek, we see no change in business prospects for TC Energy nearer term. The company continues to progress on building out its gas infrastructure network across Canada, the U.S. and Mexico to support LNG exports, industrial and manufacturing growth, coal-to-gas switching and electrification.

PG&E Corporation is a regulated utility operating in Central and Northern California serving 5.3 million electricity customers and 4.4 million gas customers in 47 of the 58 counties within the state. PG&E shares underperformed in January as the Southern California wildfires heightened investor concerns over wildfire-related liabilities and the company’s overall risk exposure. We have taken risk management actions and will continue to monitor the developments, particularly as it relates to the wildfire fund and any additional regulatory and political support for utilities in the region to address wildfire risk.

During the month, we initiated a position in French toll road operator Vinci, which is attractively valued, as the toll roads in France are mature, the company is in a highly free cash flow generative phase, and they continue to reallocate and invest excess cash to build out their infrastructure portfolio, including their airports business, which currently operates more than 70 airports across 14 countries.

All returns are in local currency.

Positioning and Outlook

We expect robust global growth 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 a final decision on investments in the next five years from the regulator should be supportive.