Year-to-date to March 31, the Ninepoint Global Infrastructure Fund generated a total return of 12.98% compared to the MSCI World Core Infrastructure Index, which generated a total return of 13.11%. For the month, the Fund generated a total return of 4.04% while the Index generated a total return of 4.85%. After an extremely disappointing Q4 in 2018, the broad markets posted the best first quarter returns since 1998. Sectors traditionally associated with infrastructure assets (utilities, industrials, energy and real estate) generated particularly strong gains to start the year.
As we discussed in our previous monthly update, the rally has been driven by multiple expansion as forward earnings estimates only now look to be bottoming. In fact, Q1 earnings will likely come in flat to slightly down on a year over year basis, before growth reaccelerates through the balance of 2019. The market, acting as a forward discounting mechanism, has rallied as global recession fears faded, sentiment improved, and a few key economic indicators showed early signs of reacceleration.
Although the US-China trade war has clearly had an impact on economic activity in the first quarter of 2019, China has been aggressively stimulating its economy, which seems to be having the desired effect. After three months of contraction, the Caixin China Manufacturing PMI rose to 50.8 in March, from 49.9 the previous month, beating expectations of 50.1. Corroborating the return to economic expansion, the Official NBS Manufacturing PMI in China rose to 50.5 in March from a three-year low of 49.2 in February, beating expectations of 49.5. In the United States, the ISM Manufacturing PMI also improved in March to 55.3 from 54.2 in February, versus expectations of 54.5. Trade negotiations appear to be going well and most commentators are expecting some form of a deal to be completed by the end of April.
Adding further support to the rally, the US Federal Reserve completely and officially pivoted from hawkish to dovish (almost unbelievably over the span of just a few months) at its FOMC meeting on March 20. In addition to leaving the benchmark funds rate unchanged in a range of 2.25% to 2.50%, they indicated that no additional rate hikes would be coming in 2019 and the balance sheet roll-off program (quantitative tightening) would be completed by the end of September. Interestingly, the market has extrapolated this dovishness and has priced slightly more than a 50% chance of an interest rate cut by the end of 2019, but we believe that these odds overstate the likelihood of lower rates in 2019.
As bond prices quickly adjusted to the messaging from the FED, a forward-looking recession indicator was triggered with the inversion of the 3-month to 10-year yield curve (although the more widely-watched 2-year to 10-year yield curve remained positive). Thankfully, the 3-month to 10-year yield curve quickly steepened and will likely prove to be a false signal in terms of predicting a recession within the next 12 to 18 months. We will be diligently watching consumer confidence and jobless claims for any signs of an impending economic downturn, but for now low interest rates will serve to boost economic activity and support continued earnings multiple expansion.
Top contributors to the year-to-date performance of the Ninepoint Global Infrastructure Fund by sector included Industrials (+397 bps), Utilities (+298 bps) and Real Estate (+225 bps) while top detractors by sector were limited to the Financials (-21 bps).
Source: Ninepoint Partners
Given the impressive performance of the Utilities sector year-to-date and full valuation levels, we have reduced our exposure well below market weight. Instead, we have allocated capital to the Information Technology, Communication, Industrials and Energy sectors in line with our “total-infrastructure” approach.
Source: Ninepoint Partners
At the stock specific level, top contributors to the year-to-date performance included ONEOK (+90 bps), Pembina Pipeline (+87 bps) and American Tower (+53 bps). Top detractors year-to-date included Intercontinental Exchange (-23 bps), Engie (-18 bps) and Northland Power (-17 bps).
In March, our top performing investments included American Tower (+45 bps), ONEOK (+ 34 bps) and Crown Castle (+31 bps). Top detractors in March included Northland Power (-16 bps), Enbridge (-9 bps) and American Electric Power (-9 bps).
The Ninepoint Global Infrastructure Fund was concentrated in 31 positions as at March 31, 2019 with the top 10 holdings accounting for approximately 33.5% of the fund. Over the prior fiscal year, 29 out of our 31 holdings have announced a dividend increase, with an average hike of 16.0%. Using a total infrastructure approach, we will continue to apply a disciplined investment process, balancing valuation, growth and yield in an effort to generate solid risk-adjusted returns.
Jeffrey Sayer, CFA
1 All returns and fund details are a) based on Series F units; b) net of fees; c) annualized if period is greater than one year; d) as at March 31, 2019; e) 2011 annual returns are from 09/01/11 to 12/31/11. The index is 100% MSCI World Core Infrastructure Index (CAD) and is computed by Ninepoint Partners LP based on publicly available index information.
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