Global Infrastructure Value Strategy July Commentary

Key Takeaways

• Infrastructure rose strongly in July, outperforming global equities. Signs of a long-awaited market broadening began to appear, driven by the strong prospect of a U.S. interest rate cut in September, cuts in other economies underway, and positive corporate earnings.
• Our global listed infrastructure strategies outperformed infrastructure benchmarks and global equities for the month.
• We remain balanced between more defensive regulated utilities and more GDP-sensitive infrastructure names.

Market Overview

Infrastructure rose strongly in July, outperforming global equities. Signs of a long-awaited market broadening began to appear, driven by the strong prospect of a U.S. interest rate cut in September, cuts in other economies underway, and positive corporate earnings. U.S. 10-year Treasury yields declined on economic reports and growing investor optimism for rate cuts during the month, ultimately ending at 4.04%, or 36 basis points lower.

Among listed infrastructure sectors, communications and renewables performed well on an easing monetary environment. Water utilities also outperformed; in the U.K., the regulator’s draft determination base weighed average cost of capital was released and in-line with the consensus range, alleviating some uncertainty heading up to the determination. This will still involve some maneuvering however, before the determination is finalised in December. Oil prices declined to their lowest level in nearly two months, as faltering Chinese growth weighed on expectations for global demand. The price per barrel of WTI crude fell from $81.54 at the beginning of the month to $77.91 at the end. Energy infrastructure was among laggards in the infrastructure market. Meanwhile, rail performed well amid higher volumes. U.S. rails saw minimal damage from Hurricane Beryl and Houston flooding, with cleanup going better than expected and no material downside to operations.

Portfolio Highlights 

Our global listed infrastructure strategies outperformed relevant infrastructure and global equities benchmarks for the month.

On a regional basis, the U.S. and Canada (+3.37%) was the top contributor for month, with U.S. communication company American Tower (+0.53%) and U.S. electric utility NextEra Energy (+0.40%) the lead performers. American Tower is a leading independent owner, operator and developer of wireless and broadcast communications infrastructure. The company has 41,000 sites in the U.S. and a further 139,000 sites across 19 countries, predominantly emerging markets (75,000 in India, 40,000 in Latin America and 18,000 in Africa). Shares outperformed as the market favoured more defensive sectors, while tower stocks, being notably sensitive to interest rates, experienced additional benefits due to the decline in bond yields.

NextEra Energy (NextEra) is an integrated utility business with a regulated utility operating in Florida and is the largest wind business in the U.S. NextEra’s regulated business, including Florida Power & Light, serves nine million people in the State of Florida. NextEra’s share price benefited from a strong quarterly result, better than expected renewables backlog additions and an announced renewables deal with Google.

U.S. electric utilities Constellation Energy (-0.18%) and CenterPoint Energy (-0.22%) were the largest detractors.

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 shares fell amid concerns of potential challenges to behind-the-meter generation, to which we ultimately ascribe low probability of going through.

CenterPoint Energy is an electric and natural gas utility serving 7 million customers in eight states across the U.S. The majority of operations are in Houston, Texas. CenterPoint Energy shares underperformed after the company was criticised for its preparation and restoration efforts related to Hurricane Beryl.

During the month, we initiated positions in Canadian electric utility Emera, Canadian energy infrastructure company TC Energy and U.S. energy infrastructure company Williams Companies.

All returns are in local currency.

Positioning and Outlook

We remain generally balanced between more defensive regulated utilities and more GDP-sensitive infrastructure names. With increased confidence by market participants that we are at the end of the rate hiking cycle and now looking toward the start of the rate-cutting cycle, we believe this could be the start of the turn for many of our long-duration assets such as towers and renewables. Notwithstanding near-term supply-side constraints around labour and aircraft deliveries, we are positive on airports, where valuations are attractive. 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 reduced valuations.