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Global Infrastructure  Download PDF
June 30, 2008
We are pleased to share with you our review of the global infrastructure securities market as of June 30, 2008. In the second quarter, the UBS Global 50/50 Infrastructure & Utilities Index had a total return of –2.4%.
Investment Review
The quarter was a volatile one for equities around the world. Stocks began the period on a strong note, reflecting a moderation in risk aversion after the U.S. Federal Reserve announced it would help JPMorgan Chase acquire Bear Stearns. But conditions deteriorated in May, and especially in June, as surging oil prices contributed to global stagflation fears—an unwelcome mix of rising inflation along with slowing economic growth. The prospects for interest-rate cuts by the world’s central banks faded, and the probability of rate hikes later this year rose.
Global infrastructure securities declined in this environment, although performance varied by sector. In general, rising oil and fuel prices supported utilities and energy infrastructure shares, but weighed on transportation infrastructure stocks as demand proved more sensitive to higher costs.
In news, a consortium consisting primarily of Abertis (an operator of toll roads in Europe and Latin America) and Citigroup are awaiting legislative approval of their $12.8 billion bid for a 75-year leasing concession for the Pennsylvania Turnpike. In addition, Public Service Enterprise Group (PEG), a New Jersey electricity and natural gas utility, announced that it is selling its Chilean utility subsidiary to a private consortium composed of Morgan Stanley Infrastructure and Ontario Teachers’ Pension Plan.
These developments underscore our theme that infrastructure assets have investment characteristics sought by private investors, and that they will increasingly find their way into listed markets (the global listed infrastructure market currently has a market capitalization of $2 trillion). Like commercial real estate, the asset class is associated with large projects with contractual cash flows that tend to be long-term, visible and relatively stable. The PEG asset sale also highlights the interest large global infrastructure investors have in utilities.
Investment Outlook
Within a highly uncertain economic environment, we believe that infrastructure securities have the potential to outperform as investors seek less cyclical sectors of the stock market. In our view, even the more economically sensitive sectors within infrastructure are less cyclical than equities as a group.
We also believe that investors could find infrastructure securities appealing based on valuations and growth profiles. Global utilities currently trade at a price-to-earnings multiple of 14.5 times one-year forward earnings, in line with their historical average. However, utilities have a projected annual growth rate in the 9% to 11% range for the next three years, well above the historical average. At June 30, the three main transportation sectors—toll roads, ports and airports—were trading below their long-term cash-flow multiples.
The views and opinions in the preceding commentary are as of the date of publication and are subject to change. This material represents an assessment of the market environment at a specific point in time, should not be relied upon as investment advice and is not intended to predict or depict performance of any investment.
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