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Global Infrastructure
As of March 31, 2012
i>We would like to share with you our review of the global infrastructure securities market as of March 31, 2012. For the month, the UBS Global 50/50 Infrastructure & Utilities Index had a total return of +0.3% (net of dividend withholding taxes). For the year to date, the total return was +4.5%.
INVESTMENT REVIEW
Global equity markets advanced steadily in the first quarter as signs of a self-sustaining economic recovery encouraged investors. U.S. economic indicators improved, and the Federal Reserve announced it will keep interest rates low through 2014. The European Central Bank (ECB) unveiled a second Long-Term Refinancing Operation (LTRO) program in February, bringing the total to $1.3 trillion. (The first was launched in December.) The move reassured investors that the ECB was intent on containing the eurozone’s sovereign debt crisis. China and Brazil also announced easing measures.
Economically sensitive-subsectors led the index
Investors greeted the good news by moving out of the defensive stocks that dominated much of 2011 and into cyclicals, which entered the quarter at comparatively low valuations. The MSCI World Index had a total return of 11.7% in the quarter, compared with 4.5% for the UBS Global 50/50 Infrastructure & Utilities Index. Within the UBS index, more economically sensitive subsectors outperformed their defensive counterparts.
Water companies (which had a total return of +15.9%(1) ) led the index, driven by sharp rebounds in Veolia Environment and Suez Environment, both domiciled in France. Veolia had issued two profit warnings in 2011, but its situation improved along with the continent’s economic outlook. Airports (+11.7%), marine ports (+8.1%) and toll roads (+7.3%) were also pockets of strength likely to benefit from a stronger global economy, monetary easing and a pick-up in trade. Within the communications subsector (+8.7%), towers continued to perform well; demand for wireless data services showed no signs of abating.
Electric utilities’ appeal dimmed
Not surprisingly, traditionally defensive subsectors, such as electric utilities (–0.3%, the only subsector with a negative total return) lagged. U.S. integrated utilities, which are typically more sensitive to fluctuations in demand than regulated utilities, struggled with sluggish demand and a steep decline in natural gas and power prices. In Spain, the large integrated utilities faced regulatory risks associated with their ability to recover the full costs of production, transmission and delivery to their customers. Pipelines (+3.6%) also trailed the index, due in part to TransCanada, which retreated following the U.S. government’s rejection of its Keystone XL pipeline proposal in January.
INVESTMENT OUTLOOK
We believe that stabilizing U.S. economic data and somewhat better credit conditions in Europe will benefit all equities, including infrastructure securities. We remain watchful, however. The situation in Europe is fluid, and headwinds persist. While the LTRO program appears to have helped avert a near-term financial crisis, there are still questions about the continent’s sovereign-debt issues and the longer-term growth impact of severe austerity measures. Governments, especially those in Europe’s periphery, have a history of taxing state-controlled infrastructure companies during difficult times. Emerging markets look somewhat stronger, in our view, as many regions have seen both monetary easing and stronger structural demand.
Infrastructure securities’ predictable income, modest volatility and long-term growth potential have always attracted income-focused, risk-averse investors. If market volatility increases in the second half of the year, we expect these qualities will exert an even greater pull. We are currently focused on subsectors we believe offer attractive relative valuations and compelling growth dynamics, such as pipelines, water and communications infrastructure. We will maintain our significant underweight in electric utilities in view of continued sector-specific fundamental and regulatory risks.
(1) Sector returns are in local currencies as measured by the UBS Global 50/50 Infrastructure & Utilities Index.
Past performance is no guarantee of future results.
The performance information in the preceding commentary does not reflect the performance of any Cohen & Steers Fund. Fund performance information is available through the link or links below.
Cohen & Steers Global Infrastructure Fund Performance
Please consider the investment objectives, risks, charges and expenses of any Cohen & Steers fund carefully before investing. A prospectus containing this and other information can be viewed by clicking here or may be obtained by calling 800-330-7348. Please read the prospectus carefully before investing. Cohen & Steers open-end funds are distributed by Cohen & Steers Securities, LLC.
The views and opinions in the preceding commentary are as of the date of publication and are subject to change. This material should not be relied upon as investment advice, does not constitute a recommendation to buy or sell a security or other investment and is not intended to predict or depict performance of any investment.
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