We revisit some of the main industry views we have put forth over the past 12 months (October 2011 - October 2012), to examine to what extent they have played out, and what the outlook is going into 2013 for major equity groups in infrastructure. Our proprietary Global Infrastructure Index is still pointing to an ameliorating picture for the industry as a whole ( also see our previous global analysis July 20, ' Infrastructure Equities Reflect Ameliorating Picture ' ), with utilities and machinery underperforming the wider industry. However, the overall index is in an uptrend, suggesting that we can see green-shoots throughout the industry.
|Infrastructure Equities In An Uptrend|
|BMI Infrastructure Index, BMI Infrastructure Index 1-year Performance (%), By Sector|
We maintain our bearish French infrastructure view . Our outlook on France's infrastructure is based on BMI 's France macro outlook, which is pointing to a precarious picture, especially for public finances, which have been the linchpin behind infrastructure financing in France over recent years. The French banking sector and its ability for large scale project finance amidst the sovereign debt crisis in Europe and Basel III is the second pillar of our bearish outlook. Combined , the two issues suggest that French infrastructu re sector's growth will moderate in the coming quarters and adjust to the new macro and financial reality. We believe that Bouygues and Eiffage are most at risk to be dragged down if the sector underperforms, with Vinci's diversification over the past 12 months acting as a safety net for the stock.
|France Major Construction Companies, EUR|
Our bullish view for the construction sector throughout the GCC has been substantiated by the astonishing rally of some of the largest listed const ruction companies over the past 12 months. UAE based Arabtec has been the second best performing stock in BMI 's Infrastructure Index over the past 12 months, rising by 111%. We hold a bullish view on companies with a well diversified portfolio across the GCC infrastructure and construction sector that allows taking advantage of opportunities and spreading the risks.
|Bullish Middle East Construction|
|Arabtec, Drake and Scull, AED / Orascom Construction, EGP|
One of the best performing sectors across the industry has been the US homebuilders. We formulated our bullish view on the US homebuilders segment during the third quarter of 2011 and since then it has taken shape nicely, with the main homebuilders in the United States posting strong gains on the back of rising confidence in the sector ( see our online service, January 13 2012, ' Lennar Results Support Housing Recovery View ' ). According to the latest National Association of Home Builders/Wells Fargo Housing Market Index, confidence is returning rapidly, thoug h overall the index is below 50; an indication that the majority of the market participants surveyed view the home sales conditions as poor. If however the index continues to rise in the current levels (it gained nearly 28 points since January 2012 ), it will surpass the 50 point mark in the next six months. US homebuilder equities track the HMI closely, therefore we expect the uptrend in their share prices to continue .
|Rally Has Further To Run|
|US Homebuilders - Lennar, PulteGroup, KB Homes|
Another top performer over the year has been Mexican infrastructure and construction player Empresas ICA . The company is one of the strongest Latin American-listed infrastructure players and in our view i t is on its way to become a strong barometer for the entire LatAm infrastructure sector. We believe that I CA's development from a Mexican- focused construction company to a regional heavy-weight came at the right time and its stock performance supported our bullish view of ICA over its bigger rival IDEAL , which is exclusively focused on the Mexican infrastructure sector. Since we looked at the factors why ICA would perform better than its Mexican rival IDEAL, the stock has gained 101% ( see our online service, October 14 2011, ' Strong Fundamentals Support Our Optimism For ICA Over IDEAL ' ).
|ICA Diversification Bolsters Stock Performance|
|Mexican Construction - ICA, IDEAL, MXN|
We have been bullish on the US midstream operators for more than 15 months based on the capacity constraints on the US energy transport network, which makes available capacity all the more valuable ( S ee our online service , February 2 2012, ' Bullish Outlook on Midstream Sector Plays Out ' ). Oil and liquids transportation companies have been reaping windfalls from the astonishing growth taking place in the US oil and gas upstream segment. While in the upstream segment returns have been volatile, especially for the natural gas-heavy producers, the necessity for transportation of higher volumes has meant that energy transpo rtation companies (from specialist rail freight to trucking to barges and of course pipelines ) have been reaping significant benefits. Midstream energy is a sector we expect to see a lot of investment continuing in the coming years, therefore we also see rewards for engineering companies in the sector. The US Pipelines Index from Bloomberg has outperformed the S&P 500 Energy Index for most of 2012 and is currently trading 23% highe r than this time last year.
|North American Energy And Wider Market Indices, 100 = October 2011|
We expected the Infrastructure sector equities in India to outperform the wider market , from both a technical and fundamental perspective ( see our online service , January 12 2012, ' Macro/Industry Strategy: Indian Infra, US Autos, Morocco ' ) . Having said that, the Indian business environment remains fraught with risks and difficulties, even for the majors that dominate the industry, and thus creating a discount to the stocks. Larsen and Tourbo has had an impressive year, rising by 16.5% since this time the previous year , outperforming its peers . However, major structural risks remain and with the ailing macro picture still in play, we expect several bumps along the road. Therefore , we take a cautious and certainly long term approach to our optimism.
|Infrastructure Sector In India Holding Up|
|Indian Infrastructure Companies, INR|