Infrastructure, REITs, and Utilities faced challenges during Covid-19, and in 2023 due to the market’s focus on rising interest rates overshadowed the long-standing pricing power of listed Real Assets. However, the tail end of 2024 has brought a shift.
The headwinds of recent years are now turning into tailwinds for the sector. Inflation pass-through mechanisms, which can take months to years to manifest, are now positively impacting rents, tolls, and utility bills. Additionally, the adverse effects of higher interest rates are reversing in many regions.
Resilience in Volatile Markets
During the sharp global equity market sell-offs in early August and early September, our Australia-focused Martin Currie Real Income strategy (80% ASX-listed, 20% developed market offshore) and the Martin Currie Global Real Income strategy (18% ASX-listed, 82% offshore) have demonstrated significant resilience performance since the June quarter end compared to more volatile broader equity market indices.
We believe that this resilience can be attributed to a key feature of our investment process – a focus on investing in ‘essential building blocks of society’. The resilience, albeit short-term so far, signals to us a return to rationality in the market’s view of listed Real Assets as a diversifying anchor. The Real Assets we target typically exhibit lower economic sensitivity. Our unique process seeks high-quality listed Real Assets with an essential-use nature, dominant assets with pricing power, and recurring cash flows that grow with inflation and urban population growth.
We are particularly looking for Real Assets operating in cities and regions experiencing strong demographic growth, avoiding areas or countries with declining populations and thus declining demand.
Long-Term Growth Drivers
In addition to the urban population growth thematic, which is applicable to all our holdings, we see the long-term returns of listed Real Assets also driven by key megatrends, including:
- Energy Generation and Transmission Demand: Driven by increasing electrification; and
- Exponential Data Storage and Network Needs: Super-charged by growing AI demand.
Key stocks we hold across both portfolios that are aligned with these trends include:
- Digital Realty: A global leader in Data Centre ownership and operation, benefiting from the tailwinds of rising data usage, with high returns on incremental capital flowing into attractive dividends
- AGL Energy (Australia), Emera and TC Energy (Canada) and National Grid (UK): Leading utilities supporting electrification for the energy transition, and energy demand growth from data centre and AI demand
- APA Group: Gas transmission and distribution business with energy transition and peaking fuel role, and a growing presence in contracted clean energy solution such as solar, wind and electricity transmission.
We also see significant potential in assets poised to benefit from inflation and population growth, such as toll road operator Transurban, rail freight operator Aurizon, and retail landlord Scentre Group. New Zealand’s high-speed broadband provider Chorus services New Zealand’s growing population and their regulated asset base and revenues also directly reference inflation. Recently, both strategies also initiated an investment in Auckland Airport, set to benefit from New Zealand population growth and the rise of the Asian middle class.
An Enduring Positive Outlook
We remain very constructive on the outlook for the listed Real Asset sector. Despite recent strong returns, our portfolio holdings are still priced at an attractive discount to our fair value assessment.
With interest rates now becoming a tailwind, and positive earnings and dividend revisions flowing in, while broader equities face the opposite, the portfolio’s fundamentals continue to improve.
This, combined with the ongoing appeal of Listed Real Assets’ leverage to the megatrends, offers a powerful combination for an attractive yield, income growth and steady returns in an increasingly uncertain world.
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Learn more about Martin Currie's Real Income strategy.
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Learn more about Martin Currie's Global Real Income strategy.
Important information
Any distribution of this material in Australia is by Martin Currie Australia (‘MCA’). Martin Currie Australia is a division of Franklin Templeton Australia Limited (ABN 76 004 835 849). Franklin Templeton Australia Limited is part of Franklin Resources, Inc., and holds an Australian Financial Services Licence (AFSL No. 240827) issued pursuant to the Corporations Act 2001.
This publication is issued for information purposes only and does not constitute investment or financial product advice. It expresses no views as to the suitability of the services or other matters described in this document as to the individual circumstances, objectives, financial situation, or needs of any recipient. You should assess whether the information is appropriate for you and consider obtaining independent taxation, legal, financial or other professional advice before making an investment decision.
Neither MCA, Franklin Templeton Australia, nor any other company within the Franklin Templeton group guarantees the performance of any Fund, nor do they provide any guarantee in respect of the repayment of your capital.
The document does not form the basis of, nor should it be relied upon in connection with, any subsequent contract or agreement. It does not constitute, and may not be used for the purpose of, an offer or invitation to subscribe for or otherwise acquire shares in any of the products mentioned.
Past performance is not a guide to future returns.
The distribution of specific products is restricted in certain jurisdictions, investors should be aware of these restrictions before requesting further specific information.
The views expressed are opinions of the portfolio managers as of the date of this document and are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. These opinions are not intended to be a forecast of future events, research, a guarantee of future results or investment advice.
The information provided should not be considered a recommendation to purchase or sell any particular strategy / fund / security. It should not be assumed that any of the securities discussed here were or will prove to be profitable. It is not known whether the stocks mentioned will feature in any future portfolios managed by MCA. Any stock examples will represent a small part of a portfolio and are used purely to demonstrate our investment style.
Risk warnings - Investors should also be aware of the following risk factors which may be applicable to the strategy shown in this document.
- Investing in foreign markets introduces a risk where adverse movements in currency exchange rates could result in a decrease in the value of your investment.
- Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. Accordingly, investment in emerging markets is generally characterised by higher levels of risk than investment in fully developed markets.
- This strategy may hold a limited number of investments. If one of these investments falls in value this can have a greater impact on the strategy’s value than if it held a larger number of investments.
- Smaller companies may be riskier and their shares may be less liquid than larger companies, meaning that their share price may be more volatile.
- Income strategy charges are deducted from capital. Because of this, the level of income may be higher but the growth potential of the capital value of the investment may be reduced.