Notes from the road: European Infrastructure

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Andrew Greenup, Deputy Head of Global Listed Infrastructure, recently left a hot Australian summer to fly into a cold European winter where he spent a week on the road researching local infrastructure.

First State News

  • In Europe, there is plenty of corporate confidence in spite of the political turmoil
  • Earnings upgrades are likely to continue in 2017 for the European infrastructure sector
  • We continue to invest in toll roads, airports, ports, railroads, utilities, pipelines and mobile towers

I was positively surprised by the strength of the European economies I visited, the high degree of corporate confidence despite weak governments and upcoming elections as well as the (so far) rational deployment of capital by most companies in value accretive investment decisions.

The main negative surprises were the degree of downside that persists in European integrated utilities earnings, some over-exuberance in renewables investment with too much money chasing too few assets, and a British government relying less on competitive markets and more on government-led industrial solutions.

"An underweight exposure has been maintained in interest rate sensitive utilities, especially those with lower earnings growth outlooks."

As always, European infrastructure firm’s refusal to buy back their shares remains a disappointment. However when this changes, it will provide significant upside to infrastructure equity holders.

In my last European travel diary nine months ago I wrote that these companies were in an earnings upgrade cycle. Despite Brexit and a year of difficult elections, I believe earnings upgrades will continue in 2017 for the European infrastructure sector.

At a fund level, we continue to invest in toll roads, airports, ports, railroads, utilities, pipelines and mobile towers. These sectors share common characteristics, like barriers to entry and pricing power that can provide investors with inflation-protected income and strong capital growth over the medium-term.

In the near term, we anticipate that potential headwinds to the asset class could include higher bond yields, and political or regulatory interference. We also favour mobile towers as we believe the market continues to underestimate mobile data growth, and to overestimate potential risks to free cash flows, for these strategically valuable and well-managed infrastructure companies. An underweight exposure has been maintained in interest rate sensitive utilities, especially those with lower earnings growth outlooks.

We see a number of tailwinds for the year ahead, including ongoing structural drivers (like demand for mobile data or renewable energy); and shifting asset allocation from low-yielding bonds and volatile equities towards real assets.


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