Global Listed Infrastructure - January 2012 Review & Outlook
Cohen & Steers
February 21, 2012
We would like to share with you our review of the global infrastructure securities market as of January 31, 2012. For the month, the UBS Global 50/50 Infrastructure & Utilities Index had a total return of +1.3% (net of dividend withholding taxes).
January brought good news to global equity markets: improving economic indicators, progress with Europe’s sovereign debt issues and the Federal Reserve’s announcement that it will keep interest rates low through 2014. Investors took heart and edged away from the defensive stocks they favored through most of 2011 in favor of more cyclical names.
We saw evidence of this shift in the global infrastructure universe. The UBS Global 50/50 Infrastructure & Utilities Index had a total return of +1.3%, compared with +5.1% for the broader MSCI World Index. Within the UBS index, more economically sensitive sub-sectors outperformed their more defensive counterparts. By region, much of Europe and Asia Pacific outperformed the United States.
Airports (which had a total return of +6.0%() in the index) and marine ports (+4.0%) were pockets of strength likely to benefit from a stronger global economy, monetary easing in Europe and a pick-up in global trade. Within the communications subsector (+3.8%), towers continued to do well. Demand for wireless data services has been growing and shows no signs of abating.
It follows that the traditionally defensive subsectors, such as electric utilities (–2.4%), held less appeal for investors. U.S. integrated utilities are more subject to supply and demand than regulated utilities, and demand is currently low, which has driven down wholesale electricity prices. In Spain, the large integrated utilities continued to face significant regulatory risk associated with their ability to recover the full costs of production. Pipelines (–1.2%) also lagged the index, led by TransCanada, which underperformed following the U.S. government’s rejection of its Keystone XL pipeline proposal.
We have a positive near-term outlook for infrastructure securities based on improving U.S. economic data and stabilizing credit conditions in Europe. But there are still headwinds. The road to Europe’s recovery is unlikely to be smooth; and in the United States, state and local government debt may dampen growth. Emerging markets are likely to be somewhat stronger, in our view, driven by better structural demand. For this reason, we have increased our investments in Brazil, China and Mexico.
This year—which is also an election year in the United States—is likely to be marked by continued volatility, and we think that will enhance the appeal of infrastructure investments. In this near-zero interest-rate environment, infrastructure securities will also appeal to yield-hungry investors, particularly if market risks are perceived to rise. We have assumed more risk for now—for example, by reducing our position in the more defensive regulated electric utilities. Regionally, we remain cautious toward Europe, but have modestly narrowed our underweight in the region based on improving valuations coupled with growing regional policy and monetary actions.
(c) Cohen & Steers