Global Infrastructure Value 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.

• 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.

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 strategy outperformed global equities and most infrastructure benchmarks for the month.

On a regional basis, the U.S. and Canada (+0.62%) was the top contributor for month, with U.S. electric utility Entergy (+0.87%) and Canadian gas utility TC Energy (+0.35%) 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.

TC Energy is a North American energy infrastructure company managing over 93,300 km of natural gas pipelines, 4,900 km of liquids pipelines and 4.3 GW of power assets. Nearly 100% of its cash flows are backed by stable long-term contracts and cost-of-service tolling with creditworthy counterparties. TC Energy’s spinoff of its liquids pipelines business South Bow was a catalyst to reposition TC Energy as a pureplay natural gas pipeline and nuclear power company. TC Energy’s natural gas pipeline footprint is positioned to benefit from a number of secular growth drivers, including growing LNG exports, coal-to-gas switching, nearshoring and manufacturing growth, and now, data centre/AI-related power demand.

U.S. electric utility NextEra Energy (-0.29%) and U.S. communications company American Tower (-0.32%) were the largest detractors. 

NextEra Energy is an integrated utility business with a regulated utility operating in Florida and 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 was impacted by higher bond yields and an increased probability of a Trump election win, which weighed on renewable stocks. Fundamentally, the company continues to add to their growth backlog and has originated nearly 11 GW of new energy resources, renewables and storage on a rolling 12-month basis (compared to the historical average of ~8 GW per annum).

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 were lower for American Tower and other communication tower stocks, which, sensitive to interest rates, were pressured as bond yields rose.

During the month, we exited our position in U.S. communications company Crown Castle.

All returns are in local currency.

Positioning and Outlook

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