“In terms of the infrastructure markets, we continue to see strong interest in new project development and construction in the energy infrastructure space. While the 2014 decline in the price of crude oil hurt stock prices, projects continue to be executed.
We expect continued divergence in the European utilities sector between the fundamentals of those companies challenged by low commodity and wholesale power prices and those with relatively stable business models reliant on contracted or regulated revenue streams. We see a low probability of a major overhaul of the UK regulatory regime, but investor sentiment and political noise around utilities during election season could create significant volatility in the sector. Looking ahead, we prefer companies with strong positions in distribution and transmission networks and management teams that are proactive about business mix optimisation. We believe utility companies in China with operations in the clean energy and wastewater treatment sectors could also continue to benefit as the government looks to curb pollution. In the United States, we see strong growth potential from new infrastructure required for projects such as renewable energy that are related to environmental regulation. Lower returns on equity (ROEs) are a risk for the sector, but in our view, further reduction in ROEs would be a possibility only if interest rates decline materially from 2014 levels.
Among transportation infrastructure providers, global airport operators experienced above-trend traffic growth in 2014, and we expect similar traffic growth in 2015. However, there may be downside potential for those companies that will undergo regulatory reviews in the next 12 months. In the marine port sector, we expect Asian operators to benefit from further recovery in global trade despite 2014 volumes that were above management expectations. More generally, we maintain a preference for companies that have disciplined capital allocation strategies and/or have growth investment opportunities available internally. Additionally, for both the utilities and transportation sectors, particularly in Europe, those companies with attractive dividend policies may also prove popular in 2015, assuming a sustained low rate environment.”
Wilson Magee leads the global real estate and infrastructure securities team of Franklin Real Estate Advisors, a division of US asset manager Franklin Templeton.