Global Infrastructure Value Strategy November Commentary

Key Takeaways

• Strength in infrastructure was concentrated in the U.S., where GDP-sensitive energy infrastructure benefit from expectations of greater oil and gas production raising volumes for pipelines.

• Resilient economic data, potentially reflationary policy, such as tariffs from the Trump administration, and recent slight upticks in inflation have put some upward pressure on bond yields in recent weeks, causing some weakness in rate-sensitive sectors.

• We believe we are still seeing a catch up of the gap between infrastructure earnings and total returns since 2022 and we believe the defensive characteristics of infrastructure will remain valuable in what we expect to be a more volatile market in the near-term.

Market Overview

Trump’s election win in the U.S., along with a Republican sweep of Congress, was widely applauded by the market and seen as rekindling its animal spirits. Specifically, the prospect of lower taxes and less regulation bolstered hopes for continued positive economic momentum, increased M&A activity and greater corporate profits. Positive investor reception to business-friendly nominees to key economic and financial positions in the new administration helped maintain the market rally through the month.

Infrastructure also made positive gains, though more modest than broad equities in a risk-on month. Strength in infrastructure was concentrated in the U.S., where GDP-sensitive energy infrastructure benefit from expectations of greater oil and gas production raising volumes for pipelines. U.S. rail performed well on hopes of stronger economic growth and lower corporate taxes.

At the same time, resilient economic data, potentially reflationary policy, such as tariffs from the Trump administration, and recent slight upticks in inflation have put some upward pressure on bond yields in recent weeks, causing some weakness in rate-sensitive communication towers. Renewables continued to be weak on concerns of a potential roll back in U.S. Inflation Reduction Act provisions.

Elsewhere, U.K. water utilities had a strong month driven by expectations that their final regulatory determinations, due by year end, will see the companies delivering on environmental improvements, requiring capital investments that we expect will grow their asset bases and earnings.

Latin America meanwhile was the weakest region, as Brazil’s central bank gave its benchmark interest rate another hike in early November.

Portfolio Highlights 

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

On a regional basis, the U.S. and Canada (+2.50%) was the top contributor for month, with U.S. energy infrastructure company Cheniere (+0.40%) and U.S. rail operator CSX (+0.38%) the lead performers. Cheniere Energy is an energy infrastructure company that owns and operates U.S. liquefied natural gas (LNG) export facilities along the U.S. Gulf Coast. Trump’s presidential win was seen as constructive for LNG exporters such as Cheniere.

CSX operates the second-largest listed U.S.-centric railroad in terms of market cap operating in the East Coast. The company owns over 20,000 miles of track and operates across 23 states. Part of Trump’s proposed policies included a corporate tax cut, which directly benefits CSX (as a full taxpayer).  

Brazilian electric utility Eletrobras (-0.18%) and U.S. communications company American Tower (-0.29%) were the largest detractors. 

Centrais Elétricas Brasileiras SA (Eletrobras) is one of Brazil’s largest integrated utilities operating in the generation and transmission segments. On a company-specific level, Eletrobras continues to deliver strong results and continued operational performance. However, recent changes in macro expectations have resulted in higher interest rates pressuring rate-sensitive stocks like Eletrobras.

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). American Tower shares declined following the U.S. election, as the market perceived it as a relative loser in the wake of Trump’s victory.

During the month, we initiated a position in U.S. energy infrastructure company ONEOK (OKE). OKE is a BBB credit rated large cap Gas, NGLs and refined products pipeline company, with a unique competitive advantage in the Bakken region where it commands 3-4x higher margins. OKE has recently completed several acquisitions that has helped bolster its service offering, including Magellan, Medallion and Enlink. Our meeting with the CFO helped us better understand the potential synergies from those deals, and we believe the market is underestimating the commercial synergies the company can extract through blending, batching, bundling, and other asset optimisations, and therefore underpricing the true cashflow potential of the company. We exited our position in American Tower as part of funding OKE, where we see better risk-reward.

All returns are in local currency.

Positioning and Outlook

Looking ahead, we expect some volatility related to policy uncertainty, in particular as the year of global elections wraps up and given an uncertain forward path for bond yields.

We believe we are still seeing a catch up of the gap between infrastructure earnings and total returns since 2022 and we believe the defensive characteristics of infrastructure will remain valuable in what we expect to be a more volatile market in the near-term.

Opportunities continue to be widespread across the infrastructure landscape, with utility fundamentals some of the best we have ever seen. The market is still massively underestimating the growth in electricity demand driven by AI and data growth, as well as any pro-growth fiscal policy that would boost manufacturing. Utilities with exposures to these strong themes, and a high likelihood of earnings upside surprises, look well positioned.