RARE Infrastructure, a specialist global listed infrastructure investment manager, says a strong rally by Chinese renewables in the June quarter was the stand-out feature in a lacklustre quarter for emerging market (EM) equities.
George Kurian, portfolio manager RARE Emerging Markets Strategy, says: The “EM listed infrastructure sector has underperformed. Latin America experienced headwinds during the quarter, largely due to uncertainty surrounding the outcome of the Mexican presidential elections, while the Chinese equity market weakened during the quarter as trade negotiations between China and the US intensified.
“But China still offers strong infrastructure investments across certain sectors, namely gas and water.
“Two significant Chinese gas holdings in the RARE Emerging Markets Strategy rallied mainly on the back of President Xi’s speech at the National Environment Conference in mid-May where he reiterated China’s commitment to an environmental clean-up to achieve the vision of a ‘Beautiful China’ by 2035.
“The share price of two companies in our portfolio – ENN Energy and China Gas Holdings – was further supported by strong gas demand and the encouraging guidance and outlook conveyed by both companies during recent investor conferences and events in China and Hong Kong.
“ENN Energy is a major listed gas distribution utility in China with a nationwide portfolio of last-mile city gas concessions and with the longest track record among the listed peers. We believe ENN is well-positioned to deliver sales volume and earnings growth above the industry average.
“Gas Holdings (CGH) is the largest gas distribution utility in China in terms of market cap and number of projects, with a nationwide portfolio of last-mile city gas concessions. As the most ambitious early mover to tap into rural opportunities, we believe CGH is well-positioned to achieve stronger-than-peers’ volume and earnings growth.
“At RARE, we track the five-year forward-looking returns of the RARE Emerging Markets Strategy against our cost of equity. While future performance cannot be guaranteed, as at 30 June 2018, the strategy’s expected five-year annualised return was 19.1%, demonstrating the depth and breadth of the opportunities available.
“We will continue to invest across all regions of EM infrastructure as we believe that equity returns will remain significantly higher than those of developed market infrastructure companies,” he says.
The strategy’s five-year forward-looking return increased during the quarter as low expected return stocks Aguas Andinas, a Chilean water company, CESP, a Brazilian electric company, IRB Infrastructure, an Indian toll road operator and NTPC, an Indian electric company, were removed from the strategy.
“Additionally, three higher expected return stocks, Electricity Generating Public Company, a Thai electric company, Energy Development Corporation, a Philippines-based electric company, International Container Terminal Services (ICTS), a Philippines-based port operator, and Metro Pacific Investments Corporation, a Philippines toll road operator, were added to the Strategy during thiequarter.”