22 October 2016
Share prices of passenger rail firms are yet to fully reflect the structural growth potential of the sector. Photo: Bloomberg
Share prices of passenger rail firms are yet to fully reflect the structural growth potential of the sector. Photo: Bloomberg

Infrastructure plays deserve a closer look

As stock markets stabilized, infrastructure stocks posted significant gains around the world. In terms of US dollar return, the FTSE Global Core Infrastructure 50-50 Index rose 4.7 percent in October. 

Passenger rail and cell tower plays have been among the best performers. However, the freight rail segment suffered in recent months, partly due to slower than expected freight volume recovery of US first-tier rail freight operators.

We believe the outlook for rail freight industry is positive for the long term. 

Passenger rail, cell tower and toll road plays, among other “growth” type infrastructure sub-sectors will find good support in the market.

Share prices of passenger rail and cell tower firms are yet to fully reflect the structural growth potential of the sectors.

However, as the US could raise interest rates soon, some “income” type infrastructure sub-sectors with slow growth and high debt ratios — for example, energy pipeline and public utilities players — may underperform the market.

Investors may consider cutting their exposure in such companies.

As the amplitude of oil price variation narrowed, some energy pipeline companies became more attractive in terms of valuation. As the firms also provided good dividend payout ratio, some investors had returned to such “income” type industries.

But one should note that some of the companies have announced that they are cutting the dividend growth rate. Hence, it is uncertain now whether the firms can maintain the earlier payout ratios. Given this, we don’t feel very positive about the industry outlook.

All in all, global infrastructure companies have broad investment themes, encompassing activities such as toll roads, airports, railways, public utilities, pipelines, energy storage, cell towers and satellites.

The common feature among them is that they have high entry threshold and strong pricing power. Investors seeking capital appreciation and a hedge against inflation can pick some good names for medium-term investment.

This article appeared in the Hong Kong Economic Journal on Dec. 2.

Translation by Myssie You

[Chinese version中文版]

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Director of sales department, First State Investments (Hong Kong) Ltd.

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