On the 22nd of January 2021, RARE Infrastructure Limited changed its name to ClearBridge Investments Limited.

Emerging Markets Strategy December Commentary


Our Global Listed Infrastructure funds performed strongly in the fourth quarter and in line with both infrastructure and global equity indexes, which rose handily as two effective vaccines for COVID-19 and their subsequent approval for use in many countries raised expectations of a strong recovery in 2021. The risk-on sentiment benefited flows into EM markets.

The vaccine announcements raised hopes for higher economic growth as well as a return for travel and leisure, lifting cyclical areas of the market and economically sensitive user pays infrastructure assets. Renewables continued their strong performance, while energy rebounded.

The quarter saw a gradual reduction in political uncertainty as Joe Biden won the race for U.S. president and will govern with a small majority in Congress and the Senate. The lack of an overwhelming Democratic mandate could remove the near-term risk of structurally higher taxes and more stringent regulation.

Stimulus remained front and centre: the EU approved a €1.8 trillion stimulus plan and agreed to more aggressive cuts in greenhouse gas emissions over the next decade as it aims to be the first climate-neutral continent. The U.S. also passed another stimulus package, focused on delivering USD$900 billion in support with a focus on consumers, small businesses and vaccine distribution.

Hard economic data showed signs of slowing as unemployment levels remained elevated, albeit softened by support from government stimulus and job support programs, as well as accommodative monetary conditions.

Portfolio Performance

On a regional basis, Asia Pacific was the top contributor to quarterly performance (+11.92%), of which Chinese gas utilities China Gas Holdings (+1.78%), ENN Energy (+1.25%) and Indian gas utility Indraprastha Gas Limited (+1.43%) were the lead performers.

China Gas Holdings (CGH) is the largest gas distribution utility in China with a portfolio of last-mile city gas concessions. As the most ambitious early mover to tap into rural coal-to-gas opportunities, CGH is well-positioned to achieve stronger-than-peers’ volume and earnings growth. Gains were driven by solid 1H results and full year guidance announced, in terms of both profit and cash flow. China’s 2060 carbon neutrality pledge also boosted sentiment for natural gas and clean energy sectors.

ENN Energy is one of the major listed gas distribution utilities in China with a nationwide portfolio of last-mile city gas concessions and the longest operating track record among the listed players. The stock was up mainly on strong gas sales volume growth during the quarter. China’s 2060 carbon neutrality pledge was likewise supportive.

Indraprastha Gas Limited (IGL) is a city gas distribution business. It is one of India’s leading natural gas distribution companies, processing and distributing compressed natural gas and liquified petroleum gas to transport, domestic, commercial and industrial consumers. Shares rose as a ban across industries on the use of polluting gas made the use of piped natural gas (PNG) mandatory.

Elsewhere in the region, Indian electric utility Power Grid (+0.86%) also contributed to quarterly performance.

Power Grid Corporation of India (PG) is India’s principal electric power transmission company. It has a share of more than 90% of India’s interstate and inter-regional electric power transmission system. PG delivered resilient transmission and distribution performance despite COVID-19.

Chinese communications company China Towers (-0.32%) was the largest detractor from monthly performance.

China Tower is the world’s largest telecom tower infrastructure service provider with over 2 million sites and has a monopoly with over 95% market share in China. Its pricing contracts are set every five years on a cost-plus basis. The stock was dragged down along with Chinese telecom operators, which came under pressure from Trump’s executive order on curbing U.S. investments, even though the order did not involve China Tower.

All returns are in local currency.

Positioning and Outlook

This Strategy is invested in high-quality companies benefiting from structural drivers, with strong cash flow and dividend yields. We have strong conviction in the long-term opportunities within emerging markets listed infrastructure. At the regional level, the Strategy is split between Asia Pacific EM (64%) and Latin America (34%), with the remainder in cash. At the sector level, the Strategy is split between economically sensitive user pays infrastructure (57%) and regulated and contracted utilities (41%).

For the Global Infrastructure Emerging Markets Strategy, the primary quantitative tool in portfolio construction is Excess Return, on which our stock-ranking system is based. As such, driven by valuation, the Investment Committee initiated positions in Chinese communications company China Towers and Chinese gas utility China Resources Gas Group.

The fund also used the opportunity to crystallise some gains by exiting Chinese port operator China Merchants Port Holdings and Chinese electric utility China Everbright International.

Quarterly Stock Highlight

This quarter we review Jasa Marga (JSMR).

JSMR is Indonesia’s largest toll road operator. The majority of its roads are located in Greater Jakarta, a very highly populated area, which provides the basis for high traffic volume on JSMR’s toll roads.

JSMR operates under long-term concession agreements with tolls escalating by the rate of inflation.

One of the key catalysts for JSMR is the growth of its network. JSMR has several new projects in the pipeline, which will increase JSMR’s operating toll roads significantly. The bulk of these new toll roads are extensions of existing toll roads, which should act to amplify existing traffic volumes.


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