is a globally listed infrastructure.
Now these are publicly traded companies that own, operate, and develop essential long life physical infrastructure assets.
Some well known examples are Kinder Morgan, Union Pacific, and.
Just to name a few.
Now the sector is growing and shifting through a growth and income asset class.
So joining me to discuss this and more is our Emily Fochek.
She's a portfolio manager for Principal Asset Management.
Emily, thank you so much for joining us today.
Of course, thank you for having me.
So Emily, let's start off with the market environment for GLI.
So what specifically is the macro backdrop for pushing listed infrastructure forward right now?
Yeah, thank you.
Look, infrastructure we think is a very compelling opportunity at this precise moment.
Some of the broader characteristics of the equity market that you're seeing, you're seeing concentration of exposures.
You're also continuing to see a lot of geopolitical volatility and uncertainty, and you have upside risks to inflation.
And infrastructure as an asset class which can be accessed, as you pointed out through publicly traded companies tends to offer a rare combination of income, inflation protection, downside protection.
Yet you also have access to structural growth driven by many of the mega trends that are impacting other areas of the equity market, so it's really quite compelling.
I would add on to that infrastructure is also attractively valued.
After several years of underperformance, infrastructure trades cheaply relative to broader equity markets, and for these reasons we think the asset class is incredibly compelling for investors to consider at this point in time.
So Emily, take us through what you're actually seeing right now.
What are the fundamentals and drivers for this year?
Yes, absolutely.
So across most subsectors within listed infrastructure, so think utilities, energy pipelines, transportation, which are rail operators, port operators, airports, etc. across most subsectors we're seeing positive earnings growth.
Those are those that are more exciting to us in today's environment are utilities which are really benefiting from long-term.
Structural trends, both electrification as well as AI related power demand.
We also like natural gas transportation infrastructure.
We think particularly natural gas transportation companies can benefit from some of the commodity flows relating to feeding power demand and also particularly post the Iran. we are optimistic around areas like LNG, a fundamental outlook for some of those businesses outside of energy and utilities, we also like the US rail sector.
This is a space that has been very challenged fundamentally over the last 2 to 3 years, a combination of lower volumes and also. disruption.
We just got the 7th straight month of PMIs above 50 yesterday, so we're feeling good about the industrial economy.
Volumes are tracking well, and management teams are very in line to continue to deliver margin improvement, which is beneficial for shareholders.
And Emily, I want to talk a little bit more because this is a global industry, so let's explore regions.
What are you guys tracking when it comes to emerging markets infrastructure?
Yeah, so I'd point out two things.
First, we do see selective opportunity in Latin America.
Latin America, several of the countries in Latin America, Brazil, Mexico, you do have a favorable environment just in terms of monetary policy.
Uh, Mexico, the central bank, has finished their rate cutting cycle.
We expect the recent inflation numbers we've seen in Brazil mean that there are more rate cuts that Come through rate cuts tend generally tend to be supportive for infrastructure, given infrastructure assets are long duration.
Positioning is also incredibly light in Latin America.
So if you look at data that analyzes positioning, global portfolio managers tend to have less exposure to Latin America than they have in recent history.
The other area that we're pretty excited about in EM is India.
If you look on a 12 month view, the Indian stock market and infrastructure is no exception has really underperformed other equity markets globally, and so we're seeing opportunity from a bottom up perspective where we think some of the worries about energy prices mean that the stocks have overshot what fundamentals will deliver over the long term.
And so pretty excited about the Indian market as well.
Well, it's definitely exciting to see the different regions, but Emily, let's break down the sectors.
So what are the key trends for each sector of GLE?
Yes, so I think firstly I talked about transportation, right, so industrial production being stronger here in the US is very positive for US rail, and you also have some company-specific dynamics there in terms of operating margin opportunities within the utility space.
A key driver continues to be AI-related power demand, and that's driving investment across the utility landscape, whether it's electricity.
Generation power, but then also transmission distribution so some very strong fundamental trends in utilities, particularly electric utilities, and then digital infrastructure is a part of our listed infrastructure opportunity set.
And one of the areas that's pretty exciting to us currently is with publicly traded data center operators.
There's been a lot of discussion in recent weeks about the Implications of competition between model providers and what it means that there are falling token costs and for publicly traded data center operators, they tend to have irreplaceable asset bases that are actually well positioned should inference workflows become more widely adopted across enterprises and falling token costs, we believe, is likely to be a precursor for greater enterprise adoption of AI.
So let's also talk about this year specifically because there's been a lot of geopolitical disruption.
So what are the risks and watch points that you're seeing for this year?
In terms of geopolitical disruption, again, infrastructure as an asset class, we think one of the big risks for the market as a whole is really where inflation settles, and infrastructure as an asset class is positively differentiated as it relates to inflation protection.
These are predominantly contracted and regulated businesses that have the ability to pass inflation on to end users.
We also have about 20% of the opportunity set that. is energy infrastructure and so these stocks tend to do better when there are positive tailwinds for commodity prices.
So infrastructure, I think one of those big equity market risks of inflation.
Infrastructure is actually pretty well positioned.
We are obviously analyzing financing costs which can at times be a headwind, particularly for asset intensive businesses like infrastructure.
So that's something we're watching.
And then in Of geopolitical conflict, I don't think we're out of the woods yet.
We've clearly seen a pretty significant de-escalation in tensions between Iran and the US since March, but we continue to see flare-ups.
And so I think that's something that if you're thinking about providing defensiveness into your portfolio, infrastructure can be very powerful as a diversifier across relative to other equity opportunities out there.
And Emily, to wrap up, just really brief, how do, how does listed infrastructure fit into portfolios today?
Yes, so again, I'd reiterate some of these key points.
Equity markets are highly concentrated in terms of leadership.
Big tech companies are making up a larger proportion of broad indices than they ever have.
And so infrastructure offers some nice diversification.
You also have income.
You have inflation protection, and historically, I look at how infrastructure has traded in periods of equity market stress.
Infrastructure has tended to outperform pretty significantly upon large equity market drawdowns.
So there really is a strong case for diversification, particularly if you think about equity leadership broadening out from some of the large tech companies.
Well, Emily, thank you so much for joining us today here on Marc Moge.
It's a pleasure to have you.
Of course, thank you for having me.
