2019 was a positive year for the Global Listed Infrastructure sector as it delivered strong returns. The performance was driven by the strength in the underlying cash flow growth and the recovery from the 2018 de-rating.
We believe the outlook for Global Listed Infrastructure remains very positive, supported by economic activity and industry-wide secular investment tailwinds. With the asset class having now returned c. 10% p.a. over the past decade, we remain confident that it will continue to perform well as investors seek liquid defensive assets with above-market yield.
Looking forward to 2020, we expect the following key trends to affect the performance of the underlying sectors within the asset class:
- Our outlook for the energy sector remains positive as the US shale gas revolution continues to support strong volume growth in North America. The efforts to reduce carbon emissions have seen developing economies’ LNG imports surge and supply investment is thus needed on a global basis to facilitate the increasing demand for cheap gas. Management teams are focused on executing the most attractive projects, further de-leveraging balance sheets, improving ROIC whilst solidifying the move to a self-funding / retained cash flow model. Additionally, we are seeing North American oil production outpacing takeaway capacity due to the years of delay in building new pipelines, and the value of storage assets, particularly in Canada, continuing to increase on the back of this bottleneck.
- Although we remain cautious on the utilities sector, due to relatively unattractive valuations, we see some opportunities in the North American transmission and distribution sector, with drivers such as renewables, grid modernisation, safety and security, and electric vehicles representing a secular tailwind for infrastructure investments. Elsewhere, we continue to find value in European and UK utilities as we believe the regulatory and political concerns that have impacted the sector over the last 2 years are overstated, while the sector is benefiting from structural trends that support investment. We still favour the communication sector on the back of strong secular tailwinds, and we expect to see increased activity around 5G in 2020, as the race between countries and also between carriers accelerates. Capex spends are likely to increase as new spectrum and antenna technologies are deployed in order to build functionality, as well as increase speeds and capacity on the network
- In transportation, we believe that 2020 is likely to be amongst the weakest years in the past 10 for traffic growth in the airport industry. This is driven by more challenging economic conditions, airlines proactively reducing capacity, and the knock-on effects of the grounding of the 737MAX (one of the biggest contributors to global airline capacity growth). Non-aeronautical activity threatens to also remain muted as high spending nations (principally China) turn their focus to spending ‘onshore’. Despite this muted outlook, we continue to focus on airports that offer attractive value where there are idiosyncratic factors which have caused investors to stay away in 2019. In the toll road space, we expect more predictable, but slower, growth across the board. We still see high cash generation and falling capex leading to scope for dividends to surprise on the upside.
- ESG continues to be a focus, with the investment team actively engaging multiple stakeholders on various ESG related matters such as energy transition, regulation and governance.
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