CONTRIBUTORS
Shane Hurst, CFA
Portfolio Manager
ClearBridge Investments
Simon Ong
Portfolio Manager
ClearBridge Investments
Bradley Fraser
Portfolio Analyst
ClearBridge Investments
Key takeaways
- Despite recent strong performance for listed infrastructure versus equities, infrastructure valuations are still attractive on a risk adjusted basis, with some subsector nuances.
- The outlook for utilities remains constructive and largely insulated from tariffs; electric utilities continue to secure new business tied to artificial intelligence (AI) and data center growth, particularly in North America.
- In transport, while the European airport inbound market is strongly increasing, Europe outbound to the United States is lower than a year ago; toll-road usage continues to be robust even amid strong price hikes, highlighting the value of time savings for consumers such roads provide.
Insulated from tariffs, utilities are meeting AI power demand
Volatility has ticked up as a result of US President Donald Trump’s reciprocal tariffs announcement on April 2—the S&P 500 Index dropped 15% intra-month from peak to trough before rebounding strongly as Trump announced a 90-day pause to allow his cabinet to negotiate trade deals with other countries.
Against this backdrop, the listed infrastructure asset class has shown resilience and performed well on a relative basis prior to the recent policy reversal. The S&P Global Infrastructure Index was up 8% year to date through April versus the S&P 500 Index’s 5% decline.1 This downside protection is what we would expect from listed infrastructure. Despite this strong performance, however, valuations are still attractive on a risk-adjusted basis, though there are some subsector nuances that we believe are worth observing.
The outlook for utilities (electric, gas or water utilities) remains constructive and largely insulated from tariffs. These businesses predominantly service local catchments and do not have direct exposure to international trade. Certain components of a US utility’s supply chain, such as electric components, may be sourced from overseas, but our conversations with management teams have highlighted that the exposure is relatively limited. And while utilities will continue to reconfigure their supply chains, we expect they will be able to pass through any tariff-related cost inflation to the customer via the allowed return mechanisms afforded them by regulators.
Tariffs aside, electric utilities continue to secure new business tied to AI and data center growth, particularly in North America. Several utilities have recently announced data center projects and related upgrades to their earnings expectations. For example, in December, a US hyperscaler announced a US$10 billion data center site in Northern Louisiana that an electric utility will be building new gas-fired generation to support. Many similar opportunities and announcements have been made across a number of utilities we cover.
The gas utility sector is also benefiting from the AI data center theme; there is increasing recognition that gas will continue to play an important role in providing stable baseload generation for multiple decades to come, particularly as AI data centers are rolled out and call for more power. Gas pipeline companies have also been expanding their networks to facilitate this demand. Beyond AI data centers, gas demand is structurally in growth mode because of increasing LNG exports and coal-to-gas switching. Oil and gas flows between Canada and the United States are exempt from tariffs due to the existing USMCA trade agreement.2
Renewables, meanwhile, are currently awaiting clarity on a resolution regarding the fate of the US renewables tax credits in the coming months as the US budget reconciliation process unfolds. Our base-case expectation is for a gradual winding down of the production tax credits for wind and investment tax credits for solar. But there could also be a scenario where credits are removed altogether, given the administration’s supportive stance for fossil fuels. Yet, either way, we do not expect any meaningful changes to the growth prospects for onshore wind and solar, which continue to be driven by state-based targets and economics.
Gross domestic product-sensitive sectors mixed
North American freight rails saw strong volumes in the first quarter of 2025 due to the pull-forward of demand ahead of the US tariffs. However, we note that shipments from China to US ports have dropped more than 30% since the trade escalations in April, as of May 9. The outlook for freight for the rest of 2025 is uncertain and largely depends on how trade negotiations unfold. An early trade deal between China and the United States is potentially a strong positive catalyst for the sector, particularly given how beaten-up valuations are currently. All else equal, however, higher tariffs than existed prior to April 2 should weigh on trade and rail volumes.
The European airport inbound market is strongly increasing with bookings in the May to June period more than 7% higher year over year. However, the outlook for the transatlantic route is mixed currently due to an aversion to travel to the United States. While Europe-bound travel from the United States is pointing to 2% growth compared to last year, Europe outbound to the United States is currently 2% lower than a year ago.
Patronage for toll roads continues to be robust, meanwhile, driven by the inelastic demand response to considerable price hikes across key markets such as Toronto, Dallas–Fort Worth, Virginia and North Carolina. This highlights the value of time savings for consumers from using these toll roads, particularly in these congested markets.
Infrastructure valuations and fundamentals are attractive
Overall, in periods of heightened uncertainty and volatility such as the one we are in today, we expect infrastructure to exhibit resilience. With valuations currently attractive and fundamentals constructive, such resilience should only add more support to an attractive narrative for listed infrastructure.
Endnotes
- The S&P Global Infrastructure Index is designed to track 75 companies from around the world chosen to represent the listed infrastructure industry while maintaining liquidity and tradability. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future performance.
- The United States-Mexico-Canada Agreement (USMCA) entered into force on July 1, 2020. The USMCA, which substituted the North America Free Trade Agreement (NAFTA) is a mutually beneficial win for North American workers, farmers, ranchers, and businesses. The Agreement creates more balanced, reciprocal trade supporting high-paying jobs for Americans and grow the North American economy.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges. Past performance is no guarantee of future results.
Equity securities are subject to price fluctuation and possible loss of principal.
International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
Diversification does not guarantee a profit or protect against a loss. Dividends may fluctuate and are not guaranteed, and a company may reduce or eliminate its dividend at any time.
Companies in the infrastructure industry may be subject to a variety of factors, including high interest costs, high degrees of leverage, effects of economic slowdowns, increased competition, and impact resulting from government and regulatory policies and practices.
Investment strategies which incorporate the identification of thematic investment opportunities, and their performance, may be negatively impacted if the investment manager does not correctly identify such opportunities or if the theme develops in an unexpected manner. Focusing investments in information technology (IT) and technology-related industries carries much greater risks of adverse developments and price movements in such industries than a strategy that invests in a wider variety of industries.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.
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