Global Infrastructure Value Strategy May Commentary

Key Takeaways

• Infrastructure outperformed global equities in May, with both markets helped by strength in the utilities sector.

• A moderate decline in bond yields in recent weeks also helped defensive and yield-oriented sectors such as communication towers.

• We remain balanced between more defensive regulated utilities and more GDP-sensitive infrastructure names.

Market Overview

Fed officials voted to keep interest rate levels unchanged for the sixth consecutive time at the Fed’s early May meeting, although inflation showed signs of stabilising in May with the Consumer Price Index easing from 3.5% year-over-year in March to 3.4% in April while the Fed’s preferred inflation gauge, core PCE, which excludes volatile food and energy costs, was unchanged versus the previous month at a 2.8% increase.

Economic data and expectations were weaker during the month. The ISM Manufacturing PMI slipped further into contractionary territory, declining from 49.2 in April to 48.7 in May, and the University of Michigan Survey of Consumers saw consumer sentiment decline from 77.2 in April to 69.1. The U.S. economy added 175k jobs in April, a significant deceleration compared to the 315k jobs added in March, and the unemployment rate edged up to 3.9%.

Amid waning inflation indicators, a moderate decline in bond yields in recent weeks helped defensive and yield-oriented sectors such as communication towers. Plateauing traffic recovery in Japan weighed on performance in the Asia Pacific Developed region, while concerns over possible government intervention in Brazil weighed on performance in Latin America.

Portfolio Highlights

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

On a regional basis, the U.S. and Canada (+3.69%) was the top contributor for the month, with U.S. electric utility NextEra Energy (+0.92%) and U.S. communications company American Tower (+0.50%) the lead performers. 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 benefitted from a positive readthrough to power and renewables demand as a result of data centre growth from AI.

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, benefitted also due to the decline in bond yields.

Japanese rail operator East Japan Railway (-0.08%) and Brazilian electric utility Eletrobras (-0.13%) were the largest detractors.

East Japan Railway (JR East) is Japan’s largest passenger railway operator. Transporting 17 million passengers per day, JR East operates the Shinkansen high-speed rail lines north of Tokyo, as well as commuter trains within the Tokyo metropolitan network. JR East’s share price fell as Japan’s traffic recovery plateaued and looked to settle on a new normal.

Centrais Elétricas Brasileiras SA (Eletrobras) is one of Brazil’s largest integrated utilities operating in the generation and transmission segments. Eletrobras was weaker in May as President Lula’s decision to propose a change to Petrobras’ CEO sparked fears of possible government intervention at former state-owned company Eletrobras. We have since spoken to the company to ensure this will not be the case. Nonetheless, some fears remain.

During the month, we used the opportunity to crystallise some gains and exited our position in Japanese rail operator Central Japan Railway.

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 that underperformed for most of 2023, such as towers and renewables. Notwithstanding near-term noise, we are positive on long-duration, user-pays assets such as airports. 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.