RARE Infrastructure Value Fund Market Commentary – November 2009
November saw a healthy rise in global equity markets with developed markets (MSCI World, local) up 3.16% and emerging markets (MSCI EM, local) up 3.24%.
Market rises were assisted by the US indicating interest rates would remain close to zero for an “extended period” and China indicating monetary policy would remain subdued.
It was a busy month in the infrastructure space with several large capital market transactions announced and the UK water regulator, Ofwat, bringing down its final determination.
Australia’s largest toll road operator, Transurban was approached by Canada Pension Plan and Ontario Pension Plan to acquire the business for AUD6.8b. At this stage Transurban is holding out for a higher price. The shares rose 20% on knowledge of the deal becoming public.
In the US, Berkshire Hathaway, controlled by Warren Buffett made its biggest takeover to date agreeing to acquire the 77% it does not already own in railroad company, Burlington Northern for circa USD26b; the stock jumped 27% on the announcement. The offer is subject to regulatory approvals which are expected to occur in 2010. Commenting on the deal, Warren Buffet said that it was an opportunity to ‘buy a business that is going to be around in 100 or 200 years, it is the most environmentally friendly way of moving goods’.
Ofwat delivered its final water regulatory determination in November. The outcome for most water companies was better then expected as the regulator agreed to allow more capital spending and higher prices over the next 5 years. Shares in these businesses rose following the release as investors welcomed both the improved outcomes and the removal of regulatory uncertainty. These companies should benefit in a rising inflation environment as nominal returns increase with inflation. We observe that global chatter about deflation has been changed to focus on possible inflationary pressures that may occur in the future.
Elsewhere in the world we continue to see investment in infrastructure plans by governments. Spain for example, despite being in one of the worst recessions in recent history, announced it is moving ahead with its massive transport infrastructure spend of USD249b over the next 10 years with the majority (44%) on rail infrastructure and the remainder pit between roads, airports and ports.
