Infrastructure adds stability amid market crosscurrents

Bottom line up top:

• The political roller coaster and other rocky rides. Last week saw Vice President Kamala Harris secure enough delegates to capture the Democratic presidential nomination and start vetting potential running mates. Meanwhile, impacts from the global IT outage lingered, with flight cancellations, laptop crashes and other disruptions still causing headaches. Second quarter earnings season continued to deliver mixed results, highlighted by disappointing numbers for two of the Magnificent Seven stocks, Tesla and Alphabet (the parent of Google). Their weak showing earned a big thumbs down from Wall Street and hinted that the artificial intelligence (AI) tailwind may already be priced into technology stocks.
  
  Earnings will remain a key input for investors over the next several weeks. According to FactSet, S&P 500 companies are currently reporting year-over-year earnings growth of +9.8% while guiding toward +14.5% for 2025. For now, the debate continues as to whether the recent rotation out of momentum and growth and into small caps will persist.
• Which way you goin', inflation and U.S. economy? The Personal Consumption Expenditures (PCE) Price Index for June capped a week of data releases offering evidence of both slowing and continued resilience. Monthly headline PCE, which was flat in May, came in at 0.1% for June, essentially in line with consensus estimates. June's headline PCE was 2.5% year over year, also meeting expectations, and a tick lower than May's 2.6% rate. Core PCE - which excludes volatile food and energy costs and is the U.S. Federal Reserve's preferred inflation barometer - was up 0.2% in June, matching forecasts, and 2.6% year over year, incrementally higher than anticipated. Services inflation was again the largest component of core PCE (Figure 1). These PCE results are benign - although less emphatic than the cooling trend seen in June's Consumer Price Index (CPI) earlier this month - and will likely keep the Fed on track for a pivot to rate cuts, perhaps as early as September.
  
  Friday's PCE report was preceded the day before by a stronger-than-anticipated advance estimate of second quarter U.S. GDP growth. The +2.8% pace was double the first quarter's +1.4% expansion. Consumer spending contributed the most to this robust result, followed closely by business investment.
  
  Some of last week's other economic releases were more mixed. Preliminary U.S. Purchasing Managers Indexes (PMIs) for July showed service-sector activity continuing at a healthy clip and surpassing expectations at 56.0, but manufacturing shrank, falling to 49.5. (A PMI reading above 50 signals expansion, and below 50, contraction). In the housing market, both new and existing home sales fell short of forecasts even as mortgage rates came off their recent highs. Meanwhile, first-time jobless claims dipped to 235,000, from an upwardly revised 245,000 the week before, and remained below last year's peak level of 260,000. Continuing claims were also down from the prior week, at 1.85 million.

Portfolio considerations

Equity investors have been rewarded with strong year-to-date returns across most regions and countries. This has made global equity valuations more expensive, as measured by the forward price-to-earnings (P/E) ratio of the MSCI All Country World Index (ACWI). This index is currently trading at a P/E ratio of 17.9x - a 12% premium to its 10-year average.

Where might investors look for more attractively valued opportunities within the broad global equity market universe?

With rising market volatility a distinct possibility during the second half of 2024, publicly listed global infrastructure is one category worth considering. The asset class offers sound fundamentals, and a way to participate in some of the mega themes and trends currently shaping the market environment. In particular, we think listed infrastructure will likely continue to benefit from the growth of generative artificial intelligence (AI), as well as from increased onshoring and nearshoring of manufacturing operations by U.S.-based multinational companies looking to bring their supply chains closer to home.

Within the investable infrastructure universe, we favor:

• Data centers and electric power-generating developers and asset owners. Investment in new data centers is critical to supporting continued growth in the demand for generative AI. Data center facilities are heavy consumers of energy. In fact, annual energy consumption by U.S. data centers is expected to more than double by 2030 (according to McKinsey). This surge in demand will require substantial investment in new power-generating capacity globally. Investors have shown a keen interest in low- or non-emitting electricity generation, creating a meaningful advantage for developers of renewable versus conventional technologies.
• Electric distribution utilities: At their core, electric utilities are large, fixed-cost businesses. An expanding customer base and growing demand allow these costs to be spread over a larger number of customers. This can provide utilities with an important lever, enabling further investments to enhance growth while decreasing the cost to end users. Additionally, utilities trade at a sizable discount to the S&P 500 Index (Figure 2).

Lastly, global infrastructure companies are underpinned by inelastic demand for the necessary functions or services they provide. And because regulatory frameworks allow these companies to pass through higher costs resulting from inflationary impacts, the infrastructure asset class can be an effective hedge against inflation thanks to its long-term contractual cash flows.

Nuveen's Global Investment Committee (GIC) brings together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets.

Regular meetings of the GIC lead to published outlooks that offer:

• macro and asset class views that gain consensus among our investors
• insights from thematic "deep dive" discussions by the GIC and guest experts (markets, risk, geopolitics, demographics, etc.)
• guidance on how to turn our insights into action via regular commentary and communications