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Notes from the road: European infrastructure

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.

  • 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.

The value of investments and any income from them may go down as well as up and are not guaranteed. Investors may get back less than the original amount invested and past performance information is not a guide to future performance.Investment should be made on the basis of the Prospectus and Key Investor Information Document available free of charge by writing to: Client Services, First State Investments (UK) Limited, 23 St Andrew Square, Edinburgh, EH2 1BB; or by telephoning 0800 587 4141 between 9am and 5pm Monday to Friday; or by visiting If you are in any doubt as to the suitability of any of our funds for your investment needs, please seek independent financial advice. The Fund referred to in this document may be a sub-fund of First State Investments ICVC, an open-ended investment company with variable capital, regulated by the Financial Conduct Authority, incorporated in England and Wales; or First State Global Umbrella Fund plc, an umbrella investment company with variable capital and with segregated liability between sub-funds incorporated with limited liability under the laws of Ireland and authorised in the Republic of Ireland. Each fund may issue different classes of share and within each class there may be different types of share.The fund invests in assets which are denominated in other currencies; hence changes in the relevant exchange rate will affect the value of the investment. The fund invests in a single sector, which offers the possibility of higher returns, but may involve a higher degree of risk compared to investments which spread investment risk through a variety of sectors. Share price movements may have a greater effect on the overall value of these funds. The fund typically invests in a concentrated portfolio of investments and should a particular investment decline in value, this will have a pronounced effect on the overall value of the fund.Companies in the infrastructure sector (utilities, transportation and energy industries) are subject to a variety of factors which may adversely affect their business or operations. Adverse developments within these industries may affect the value of the underlying securities of the Fund. Companies involved in these industries are subject to environmental considerations, taxes, government regulation, price and supply considerations and competition. Fees and expenses are charged against the capital of the Fund. Deducting expenses from capital reduces the potential for capital growth and on any redemption Shareholders may not receive back the full amount invested.Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies. All securities mentioned herein may or may not form part of the holdings of First State Investments’ portfolios at a certain point in time, and the holdings may change over time. Issued by First State Investments (UK) Limited which is authorised and regulated by the Financial Conduct Authority (registration number 143359). Registered office Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB, number 2294743. Telephone calls with First State Investments may be recorded.


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