Hi, I'm Emily Foshag, Portfolio Manager for Principal's Global Listed Infrastructure Strategy. Welcome to our 2024 outlook.

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After a year in which defensive stocks suffered disproportionately from the higher for longer rate narrative, we believe listed infrastructure is attractively valued to start 2024. Today, valuations look cheap relative to equities, trading near levels seen during the Global Financial Crisis. This is despite the bounce we saw late last year, when a series of softer inflation prints and weaker economic data drove bond yields well off their highs.

We're also seeing listed infrastructure priced attractively against unlisted infrastructure assets, enhancing our confidence that listed infrastructure will outperform over a three year horizon. In the short term however, whether listed infrastructure delivers positive absolute returns is still going to depend, to some extent, on how the macro economic outlook evolves. For example, market consensus has been reflecting both a soft landing and interest rate cuts in the first part of the year.

We see this combination as improbable and therefore expect volatility as the market reconciles these positions in the opening months of 2024. We also see downside risks to the market's expectation for a soft landing, given that leading economic indicators continue to point to a U.S. recession over the next 12 months, and economic surprise indices in Europe have been in negative territory since mid 2023. Ultimately, though, whether it's a soft landing or deeper recession, our base case is for decelerating growth against a backdrop of inflation that exceeds long term averages.

This combination has historically been positive for the relative performance of listed infrastructure. If a deeper recession or crisis does materialize, history tells us that most risk assets, including listed infrastructure would experience short term selling pressure. But we'd emphasize that more defensive equity assets like infrastructure should outperform. The primary scenario in which listed infrastructure could underperform equities is if the market is again forced to quickly digest upside risks to terminal rates, possibly resulting from a reversal in the inflation trend or stronger economic growth.

Even so, we'd likely see less pronounced underperformance than we saw in a similar situation in 2023 given what relative valuations are now reflecting. Regardless of how the asset class performs in the short term, we do anticipate 2024 will present ample opportunities to generate excess returns from stock picking. Within listed infrastructure, we've already been benefiting from several pockets of dislocation that we felt had created scope for mean reversion even in sectors with some of the most exciting fundamental dynamics including the renewables and cell phone tower sectors.

We also believe the pessimism reflected in select Chinese infrastructure stocks may now be overdone. Moving beyond the immediate future, the long term outlook for listed infrastructure remains compelling. We have high conviction that fundamental growth drivers for listed infrastructure companies - the clean energy transition, demographic shifts, and technological innovation will remain tailwinds that should outlast today's macro concerns.

Listed infrastructure should continue to deliver comparable returns to global equities at lower volatility over the long term. And we believe the asset class has the potential to add value to any investor's portfolio. For more views from our team, you can find our latest thought capital on the Principal Asset Management website. On behalf of the Listed Infrastructure team, thanks for tuning in to hear about the opportunities we're seeing today. We look forward to speaking with you throughout the year.

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