Infrastructure stocks got off to a solid start in 2017 after outperforming global equities in general during a volatile 2016.
2016 was a volatile year for equity markets, defined by the unexpected outcomes of two key political events. The first was the decision by the UK to leave the European Union in June, which led to sharp instability in global markets before a subsequent rally. The second was the surprise election of Donald Trump as U.S. President in November. Global equity markets surged after the election outcome, while bonds sold off, amid bullish expectations regarding Trump's fiscal policy plans and its impact on U.S. growth and inflation.
Amid this volatile backdrop, the S&P Global Infrastructure Index outpaced global equities in general last year, as measured by the MSCI World Index, generating a total return of 12.42% versus 8.19%.1 That outperformance continued in the first quarter of 2017 with the S&P Global Infrastructure Index returning 7.95% compared with 6.53% for the MSCI World Index.
Does U.S. enthusiasm continue?
As we head into the second quarter of 2017, we do so with an unconventional U.S. president who has promised a program of fiscal stimulus, corporate tax cuts, less onerous regulation and pro-infrastructure investment policies. It is likely this fiscal stimulus is set to benefit the infrastructure sector, in particular, high quality, attractively-valued gas pipeline companies in both the U.S. and Canada, as well as U.S. rail companies.
Policy support from the new Trump administration could certainly provide an additional tailwind for such investments, which already offer a strong asset base and dividend growth potential. However, post-election enthusiasm could dissipate as new spending proposals move through the legislative process where particular scrutiny is likely to be applied the amount of required borrowing necessary to implement the proposals.
European QE, EM fundamentals & the US$
Turning to Europe, the quantitative easing (QE) policy adopted by the European Central Bank has supported economic growth and the continued low bond yield environment has provided an attractive investment environment for select European Utilities and Infrastructure stocks.
Lastly, after a turbulent 2016, emerging markets (EM) have had a solid start to the year, with equities outpacing their developed market counterparts. As we see it, there are attractive long term opportunities within the listed infrastructure space, with fundamental company performance remaining strong, and favorable operating conditions—as well as good cash flow generation—across much of the sector. However, shorter-term, a strengthening U.S. dollar could create a headwind for EM infrastructure and utilities stocks.
1 Source for all return data is Bloomberg, as of 3/31/17.