US v UK utilities: Which are better value?
Over the past quarter, infrastructure globally has endured some highs and lows, with the US, in particular, surging ahead and buoyed by strong economic growth while Europe has faced a series of challenges.
The US and Canada continued to benefit from strong performance across the railroad sector following the announcement of positive traffic volumes data, with many US names delivering strong returns.
Rail assets have been standout winners there and continue to look attractive.
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In contrast across Europe, investors have had plenty of negatives to focus on. The collapse of Genoa's Morandi Bridge in Italy has considerably weakened the country's toll road sector.
Following the tragedy, the Italian government has signalled it may revoke various concessions relating to the toll road firm managing the bridge. We believe this is highly unlikely and a negotiated outcome is most likely.
In the UK, political noise is clouding the water firms as investors continue to fret about a potential Labour government and the impact its recently unveiled plans for a publicly-owned water system could have.
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However, we believe this fear is overdone and any government would struggle to actually avoid paying a premium to take the assets into public ownership. It would also take a number of years to complete, so we think common sense will prevail here.
Meanwhile, the challenging environment remains for emerging markets. Growth downside risks from trade tensions persist.
Furthermore, an increasing number of emerging market countries have been caught up in financial volatility and contagion concerns initiated by the sharp depreciation in the Argentine peso and Turkish lira during the quarter.
With creaking infrastructure, is the US stuck in the past or going back to the future?
From an investment perspective, we view the US and Canadian markets as attractively valued, with US utilities continuing to show signs of value, in conjunction with North American pipelines.
Conversely, while headwinds remain for UK water stocks, including United Utilities, Severn Trent and Pennon, long-term value is very compelling.
Nick Langley is portfolio manager of the Legg Mason IF RARE Global Infrastructure Income fund
Bull Points
• US rail operators boosting North American infrastructure assets
• US utilities continue to show signs of increasing value
Bear Points
• European infrastructure hit by stock-specific events
• Political uncertainty weighing on UK assets
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