**Lazard Infrastructure Q2 2024 Insights**

Global Markets See Cautious Optimism in Q2 2024

The second quarter of 2024 saw a shift in investor sentiment, from pessimism to cautious optimism, as central banks’ interest rate policies took center stage. With inflation concerns still looming, the focus was on the rate paths of key central banks. The US Federal Reserve maintained steady interest rates, acknowledging slower progress in driving domestic inflation down to its 2% target. The European Central Bank lowered rates, citing improved eurozone inflation outlook, while the Bank of England held steady despite slowing inflation.

In this environment, the Lazard Global Listed Infrastructure Portfolio underperformed the MSCI World Core Infrastructure (USD Hedged) Index and the MSCI World Index. However, renewable energy player Atlantica Sustainable Infrastructure (AY) added to performance after a private company offered to buy 100% of its shares at a nearly 19% premium. The deal, supported by its largest shareholder, Algonquin Power & Utilities (AQN), is expected to close in Q4 2024E or early Q1 2025E, pending regulatory approvals.

American Electric Power (AEP) rose after reporting solid Q1 earnings, driven by demand from new data centers in Ohio and Texas. French toll road operator Vinci’s shares reacted negatively to two acquisitions, including a stake in Edinburgh airport, which relies on generous traffic and pricing assumptions. Vinci also suffered from political uncertainty in France, where extreme parties are leading the polls, raising concerns about sovereign risk.

US freight railways Norfolk Southern (NSC) and CSX detracted from performance during the quarter, as the market focused on IT and high-beta sectors. However, Norfolk Southern’s proxy contest with an activist investor ended favorably, strengthening its board with railroading expertise. The company also reached a consent decree to resolve federal claims and investigations related to the East Palestine derailment.

UK diversified utility National Grid (NGG) tumbled after announcing a £7 billion rights issue to finance increased organic investment. While the equity raise was not a sign of financial distress, its timing was unfortunate, coinciding with UK elections being called.

Despite market volatility, Lazard’s Global Listed Infrastructure strategy remains cautious, seeing pockets of attractive value opportunities, particularly in Europe. With inflation expected to remain above central bank target ranges for years to come, high bursts of inflation will have positive cash flow implications for toll roads, airports, railways, and non-US utilities. However, US utilities are likely to be negatively impacted.

The strategy remains underweight in the US utility sector, where valuations are scarce. However, specific stock opportunities are emerging, and Lazard may seek to take advantage of these in the months ahead. The portfolio’s concentrated nature brings higher stock-specific risk, but Lazard believes highly selective stock-picking is necessary to generate returns that properly compensate for the risk taken.

Value is emerging now, and on a 5-year view, valuations look more attractive on a risk/return basis. Lazard believes returns available in the strategy look relatively attractive compared to passive investments in infrastructure indices, bonds, or broader equity markets. The preferred infrastructure characteristics sought by Lazard will continue to serve investors well over the longer term.

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