Global listed infrastructure well positioned for uncertainty in 2025

Viewpoint

• With significant potential for geopolitical and economic uncertainty in 2025, defensive essential service assets such as infrastructure are well positioned
• While inflation is moderating and largely under control, its unpredictability persists. We continue to value embedded inflation pass-through mechanisms in infrastructure, which enhance the resilience of the asset class
• We maintain a preference for monopolistic infrastructure assets that are trading at compelling discounts to our internal valuations. These assets benefit from regulatory protections, robust contracts, and strong inflation linkages, making them attractive through the business cycle
• Large amounts of capital continue to be invested by infrastructure companies to facilitate mega themes of our time including decarbonisation, digitalisation such as electric grid connections for data centres, water quality and transportation.

What happened in 2024?

2024 saw mostly positive economic surprises, with global growth remaining healthy and the widely anticipated recession failing to materialize. This favourable economic backdrop contributed to a period of strong absolute returns for risk assets and global listed infrastructure.

For the year ending 31 December 2024, the global listed infrastructure sector underperformed global equities. This was partly driven by the enthusiasm surrounding artificial intelligence, which propelled significant gains in many large-cap global stocks. Additionally, concerns over rising interest rate pressures and the absence of increasing inflation further dampened sentiment toward the infrastructure sector.

Despite these macro challenges, we consider that the long-term fundamentals of global listed infrastructure remain robust. The sector continues to offer access to attractive long-term investment themes, underpinned by a critical role in the global economy, stable cash flows and inflation protection.

Fund Performance

The Maple-Brown Abbott Global Listed Infrastructure Fund (the Fund) delivered a net return for the year to 31 December 2024 of 15.4% versus what we call the reference index (FTSE Global Core Infrastructure 50/50 Index (AUD) return of 20.7%. Whilst we underperformed the reference index in 2024, there continues to be what we consider a strong three year relative performance period for the Fund versus the reference index as the global economy exited COVID, inflation ran out of control, interest rates subsequently increased and geopolitical instability accelerated. The Fund returned 9.5% p.a. for the three years to 31 December 2024, outperforming the reference index by 1.8% p.a.¹

Toll Roads

Toll roads with their defensive and inflation linked revenue, have played a significant role in the Fund over recent years. They again delivered strong performance in 2024, with the largest toll road holding² Ferrovial (FER) achieving a 23% return. As share prices increased, we reduced and rotated some holdings, including the introduction of Atlas Arteria to the Fund to capitalize on its discount relative to our internal valuation.

Globally, toll roads continue to benefit from a strong recovery in traffic levels and inflation-linked toll increases, reinforcing their attractiveness as infrastructure investments. Notably, Ferrovial announced strong 1 January 2025 toll increases for its largest asset, the 407 ETR in Toronto, underscoring the asset’s resilience and growth potential.

>  Metering the Tolls of Toronto’s 407 Express Toll Route

UK regulated infrastructure

The close of 2024 brought a significant event for the UK water sector with OFWAT's regulatory price review and final determination for the 2025-30 period. This regulatory decision marks a significant milestone, offering much-needed clarity for the industry. Allowed returns improved on both the current regulatory period (2019-2024) and draft regulatory determination issued in July 2024. There will be a large increase in capital expenditure over the coming five years to improve the operating and environmental performance of most UK water companies.  Allowed sector expenditure (opex and capex) is increasing from £61bn to £104bn over the five year period to 2030.  For example, for our largest water investment, Severn Trent, we believe that this will drive an approximate 10% p.a. growth in its regulated capital value – the value of its water and sewage assets as determined by the regulator on which it earns returns – which is a step change on growth seen over recent years. Our early assessment is that the Fund’s current holdings in Severn Trent and United Utilities are well positioned for the upcoming regulatory period.

In our view, despite this progress, the valuations for UK water stocks remain relatively subdued compared to historical levels, reflecting lingering caution in the market. However, we believe that this presents an opportunity, particularly for Fund holdings such as Severn Trent and United Utilities. With the improved returns and a more optimistic growth outlook now coming into focus, 2025 is expected to be a positive year for these companies.

SSE is another UK regulated infrastructure Fund holding. This company is a renewable energy developer and producer, and also a major owner of electricity transmission and distribution infrastructure in Scotland. We believe these assets are critical for connecting new energy sources onto the grid to enhance energy security.

>  Hydro generation site tour provides invaluable insights

Communication Infrastructure

Cell towers remain a large allocation in the Fund, with the communications infrastructure sector comprising approximately 15% as of 31 December 2024. The communication infrastructure sector faced challenges in 2024, driven by concerns over long bond yield increases, leverage, and a cautious growth outlook. However, we believe these headwinds are more than fully reflected in valuations. The sector's robust business models, defensive contracted earnings and long-term growth potential driven by ongoing digitalization reinforces our confidence in growth and resilience.

Looking ahead, we see cell towers as a strategic and forward-looking investment opportunity for 2025. The convergence of technological advancements, surging data consumption, and the sector's inherently defensive earnings profile create a strong foundation for future growth. As connectivity becomes ever more integral to modern life, cell towers are well-positioned to capitalize on the expanding demand for communications infrastructure.

Data centres

The year 2024 may best be remembered as the year that AI hype went mainstream and direct beneficiaries like Nvidia have progressively spread to related sectors like data centres. We still hold the view that data centre companies do not exhibit the requisite “core” characteristics of infrastructure, namely due to lower barriers to entry, higher competition and typically shorter contract lengths relative to other “core” infrastructure sectors. During 2024, we re-visited our long-standing view by analysing the key features of data centre companies and comparing these in particular to cell tower companies. Our analysis re-affirmed our view that data centre assets themselves have insufficient inflation protection, low barriers to entry and cyclical pricing that reflects shifting supply and demand.

>  Data Centers – are they infrastructure?

US utilities

For several years, we have held a favourable view on the growth prospects for U.S. regulated electric utilities backed by the ongoing decarbonisation of the energy system. In 2024, the Fund benefited from stock selection within the North American utilities sector, even though we maintained a modest underweight to the sector overall versus the reference index. However, some renewable generation focused U.S. utilities faced relative weakness during the year due to uncertainties surrounding the incentives available going forward for their investment plans. Despite these short-term challenges, the broader sector performed well and continues to offer significant opportunities for growth with the new driver being utility investment to support the rapid growth in data centre facilities.

Entergy Corporation (ETR) was a strong performer in 2024, achieving a 49% return is one such case study following the Meta announcement that they would be building a 4 million square foot data centre – their largest in the world – within the Entergy service territory. It reinforces the view that utilities operating in regions with favourable conditions—such as land availability, government incentives, and robust power infrastructure—are well-positioned to benefit.

The need for investment in U.S. utilities is expanding for several reasons. The ongoing transition of existing generation capacity is driving investments in renewable energy, energy storage, gas-fired generation, and transmission networks. This shift is necessary to modernize the grid and align with decarbonization goals. Simultaneously, electricity demand is on the rise, fuelled by the electrification of industries and transportation sectors. This growing demand not only underscores the importance of these investments but also helps ensure their affordability for customers by spreading costs over a larger consumption base.

Finally, the recent victory of Donald Trump in the U.S. presidential election has been a focal point of investment market commentary. We anticipate that President Trump’s policies will likely be favourable for U.S. midstream and gas infrastructure. This potential support could create additional tailwinds for energy infrastructure development, enhancing the growth outlook for this segment of the market. As a result, we remain confident in the sector's ability to deliver attractive returns and play a role in the Fund.

>  Will new data centers lead to value creation for US regulated electric utilities?

ESG

Given the critical role of infrastructure in addressing political and environmental challenges, such as decarbonizing the energy system in an affordable way, ESG (Environmental, Social, and Governance) analysis remains one of the cornerstones of our investment process. Our embedded ESG analysts work closely with the investment team, engaging with portfolio companies and conducting climate sensitivity valuation scenarios and analysis. This approach complements our traditional financial and valuation assessments, ensuring that ESG risks and opportunities are fully integrated into our investment decisions.

Active engagement with companies is a key pillar of our strategy to manage ESG risks and unlock value for investors. Through constructive dialogue, we aim to drive positive outcomes that enhance the financial sustainability of returns. We also view engagement as a valuable tool for uncovering hidden ESG risks and opportunities, helping to build a portfolio that is more resilient to ESG risks while being positively exposed to opportunities, such as addressing climate risks and advancing decarbonization through investment.

Macroeconomic outlook

Central bank actions in 2024 have been largely driven by the evolving economic outlook across different regions. In response to slowing inflation, central banks in the U.S., EU, UK, and parts of Asia implemented rate cuts over 2024. However there was caution about further reductions due to ongoing economic strength.  Despite the geopolitical turmoil, we remain optimistic about 2025. We believe that the outlook for defensive, essential service assets such as infrastructure remains strong, especially when compared to more economically sensitive asset classes should economic demand weaken.

While inflation looks to be on the decline globally, we do not expect it to return to pre-COVID levels in 2025. As such, we continue to see significant value in the embedded inflation pass-through mechanisms within infrastructure regulations and contracts. These features provide a degree of protection against inflationary pressures, ensuring that infrastructure remains an attractive asset class in a potentially volatile macroeconomic environment.

Our long-term interest rate assumptions remain approximately in line with current market rates, and any decline in real long-term interest rates would provide relief for the infrastructure sector. Lower rates could further support the sector’s growth, enhancing its appeal as an investment and contributing to the stability of infrastructure-related assets.

Fund outlook

We continue to favour monopolistic infrastructure assets that are trading at attractive discounts to our internal valuations, protected by regulation and strong contracts with inflation linkage and growth being driven by capital expenditure requirements.

We see substantial organic growth opportunities for global listed infrastructure, predominantly driven by the energy transition but also supported by themes such as water, transport mobility and digitalisation. Indeed, our analysis of aggregate capex for our global listed infrastructure Focus List highlights a history of increasing capex opportunities.

Parting thought

The geopolitical and macroeconomic landscape for 2025 presents much to consider, and stability is unlikely. Our focus remains on actively managing a portfolio of high-quality infrastructure assets that deliver inflation-linked cash flows and attractive rates of return. This strategy is focused on the substantial long-term capital needed to support coming investments in the world’s infrastructure networks.

1  Past performance is not a reliable indicator of future performance
2  Source: Maple-Brown Abbott Global Listed Infrastructure Fund as at 31 December 2024

Disclaimer
This document is issued by Maple-Brown Abbott Limited ABN 73 001 208 564, Australian Financial Services Licence No. 237296 (“Maple-Brown Abbott”). Maple-Brown Abbott is the Responsible Entity of the MBA Global Listed Infrastructure Fund (ARSN 164 901 982) and MBA Global Listed Infrastructure Fund - Hedged (ARSN 606 589 511) (“Funds”). Maple-Brown Abbott is registered as an investment advisor with the United State Securities and Exchange Commission under the Investment Advisers Act of 1940. This presentation does not constitute advice of any kind and should not be relied upon as such. This information is intended to provide general information only to professional investors, and does not have regard to an investor’s investment objectives, financial situation or needs. Before making any investment decision, you should seek independent investment, legal, tax, accounting or other professional advice as appropriate. This presentation does not constitute an offer or solicitation by anyone in any jurisdiction. This information is confidential and the recipient agrees not to release or reveal it to any third party. The information in this presentation is not an advertisement and is for wholesale investors only (as defined by the Corporations Act 2001 (Cth)) and is not directed at any person in any jurisdiction where the publication or availability of the information is prohibited or restricted by law.

Past performance information given in this document is given for illustrative purposes only and is not a reliable indicator of future performance. Future performance is not guaranteed and the value of investments and the income from them can fall as well as rise. No investment strategy is without risk and markets influence investment performance. Investment markets and conditions can change rapidly and investors may not get back the amount originally invested and may lose all of their investment. Returns are volatile and may fluctuate quickly and significantly.

Any companies, securities and/or case studies referenced/discussed are used solely for illustrative purposes; any investment may or may not be currently held by any Funds. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Funds.

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