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Infrastructure continues to lead the way as inflation surges

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The Reserve Bank of Australia (RBA) board raised its official cash rate last week for a third consecutive month, by 50 basis points, from 1.35 per cent to 1.85 per cent, which was largely as expected. The key takeaway was that the RBA has adopted a dovish stance saying future hikes were “not on a pre-set path” and that the economy will likely slow as a result of these hikes. Inflation is expected to continue higher in 2022 before a dramatic fall closer to the RBA’s target range of 2 per cent-3 percent. The RBA is tipping a GDP growth rate of 3.25 per cent over 2022, weakening to 1.75 per cent in 2023 and 2024. Some increase in unemployment is expected, with the jobless rate rising to around 4 per cent by the end of 2024.

This all follows from last week’s better-than-expected Q2 inflation reading, which is why a dovish surprise was delivered relative to expectations. While the outlook for interest rates and inflation continues to cause volatility in both Australia and abroad, the focus has shifted onto economic growth concerns amid a global slowdown in growth in conjunction with the central bank and RBA tightening that has been more hawkish than previously expected.

Portfolio manager at ClearBridge Investments, Charles Hamieh, points to the fact that inflation remains a large risk to economic growth as increasing energy prices and costs-of-living put pressure on consumers. The market is increasingly viewing recession as a base case. He says, “In this scenario, our global listed infrastructure strategies outperformed infrastructure benchmarks and global equities for the second quarter this year.”

  • On a regional basis, Asia-Pacific was the top contributor to quarterly performance (+1.29%), where Australian toll road operators Atlas Arteria (+0.84%) and Transurban (+0.22%) and Australian gas utility APA Group (+0.23%) performed strongly. On a regional level, the strategy’s largest exposure is in the US and Canada (39%) and consists of exposure to regulated and contracted utilities (30%) and economically sensitive user-pays infrastructure (9%).”

    “Atlas Arteria is a toll road owner and operator with its key assets being a 31% stake in the APRR, AREA, and ADELAC concessions in France and 100% ownership of Dulles Greenway in Virginia, in the U.S. In addition, it owns the Warnow Tunnel in Germany. The French concessions represent about 75% of the company’s value. Atlas Arteria performed strongly as a result of a large Australian pension fund (IFM) taking a 15% stake in the company at $8.10 a share with the expectation this would ultimately lead to a takeover offer,” says Hamieh.

    Stock commentary

    • Transurban (ASX:TCL) – Hamieh says, “Transurban’s share price increased owing to easing concerns on bond rates and a slightly better-than-expected second-half dividend driven by the ongoing traffic recovery.” The company owns toll road assets in both Australia and North America.
    • APA Group (ASX:APL) – Hamieh adds, “APA Group is Australia’s largest gas pipeline operator. APA owns and manages gas transmission pipelines in all states of mainland Australia, as well as gas storage and processing, contracted power generation, and renewable energy production. APA’s share price increased owing to a combination of factors, including continued concerns over inflation given APA’s strong inflation protection, easing concerns over bond rates, and incrementally positive views on the future role of gas in the energy transition.”




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