Invesco Global Infrastructure Fund Q2 2024: AI-Driven Growth and Market Shifts

Invesco Global Infrastructure Fund Q3 2024 Commentary (GIZAX)

Class Y and R6 shares have no sales charge; therefore performance is at NAV. Class Y shares are available only to certain investors. Class R6 shares are closed to most investors. Please see the prospectus for more details. Disinflation continued in most developed economies, with some showing more progress than others. Following the Swiss central bank's rate cuts in the first quarter, two G7 central banks - the Bank of Canada and the European Central Bank - began to cut rates in the second quarter. Additional central banks appear poised to begin rate cuts before the end of the third quarter. As supply and demand factors in Western developed economies come into better alignment over time, we believe inflation will fall further toward central bank targets and economic activity will gradually return to trend growth rates, aided by marginal interest rate cuts by major central banks. We believe the outlook for global infrastructure is positive over the medium term, with healthy economic growth, albeit down from strong levels at the start of 2024. In addition, central banks have initiated interest rate cutting cycles, which should support infrastructure valuations. We see positive tailwinds in specific infrastructure sectors where there appears to be a structural shift in growth prospects due to power demand from AI data center growth, notably electric utilities, which have been spending enormous capital to expand and modernize the grid to accommodate higher energy demand. We expect this secular trend to continue and to benefit various infrastructure sectors with exposure to data center power demand. The fund is underweight in midstream stocks whose valuations are relatively unattractive to us. Midstream stocks historically benefit from inflation and economic growth tailwinds, both of which have been moderating globally. Though the fund maintains an underweight in the midstream energy sector, Williams Cos. is one of its largest positions and an overweight compared to the benchmark. We believe Williams, a midstream stock, is poised to benefit from its exposure to data center power demand along the Atlantic coast given its Transco pipeline network. The stock has done well this year, and we believe future growth prospects are starting to be reflected in the valuation. The fund's position in National Grid has resulted in an overweight in the gas distribution segment. The company recently completed a large equity offering that has injected years of capital into its balance sheet. Additionally, its capital program has grown in order to accommodate the UK government's energy transmission goals, and it has become in our view one of Europe's most attractive network growth equity stories. The fund is overweight in the telecommunications sector, with Cellnex and Equinix (EQIX) driving the majority of the positioning due to what we consider attractive valuations and above-average growth potential. Cellnex has been exploring strategic divestments of non-core assets, which has in our view the potential to drive significant capital return in the form of deleveraging and buybacks. We don't believe this is reflected in its current valuation. In our view, Equinix is a high quality business that should benefit from the data demand driven by AI adoption. Equinix has completed an internal investigation to contest a recent short-seller report suggesting to us accounting irregularities. The fund also has a large overweight in airports, driven by Grupo Aeropuerto del Sureste. The stock is in our view attractive from a bottom-up perspective based on lack of leverage, high returns on capital and a structural growth tailwind from its exposure to Cancun Airport. We believe the stock remains undervalued given its cash flow growth profile and high potential for greater shareholder returns due to its underleveraged balance sheet and self-funded growth profile. The fund underperformed its benchmark. Relative underperformance was driven by an underweight allocation in the midstream sector and stock selection in the rail sector. An overweight in gas distribution added to relative return. The largest contributors to absolute return for the quarter were Williams Cos. and Southern Co. Southern Co. - The stock's valuation has risen as we believe the company offers an excellent opportunity to capitalize on data center demand within the regulated utilities space. The state of Georgia has taken an aggressive approach in attracting future data center customers, which has apparently driven up expectations for growth and capital spending for Southern Co. Williams Cos. - The stock's return can be partially attributed to rising power demand from AI. With a large majority of US data center demand running along its main gas pipeline, the company's geographical edge provides indirect exposure to these data centers. The company's growth expectations have risen apparently due to natural gas demand for power generation and we remain optimistic about the stock. Two of the largest detractors from absolute return for the quarter were Cellnex and Elia. Cellnex - This European cell tower company detracted from absolute return. Management's free cash flow guidance appeared to disappoint the market and rising lease expenses have been causing management to deploy capital into buying the land where its towers sit. From a long-term standpoint, we believe land ownership is historically good for profit margins because it reduces the company's cost base, but near term, it delays the free cash flow inflection that had been forecasted by the market. Also, given the leveraged nature of the company's capital structure, high interest rates have put downward pressure on valuations. Elia - This European energy transmission grid operator detracted from relative return. Elia has exposure in Belgium and Germany and currently has the highest growth rate of any European utility, driven by an aggressive capital expenditure plan to expand and modernize the grid in both countries. High interest rates hurt its valuation as the company has high external debt and equity financing needs. Still, we don't see growth opportunities changing and we consider the current valuation attractive.

Invesco Global Infrastructure Fund Q2 2024 Commentary (GIZAX)

Class Y and R6 shares have no sales charge; therefore performance is at NAV. Class Y shares are available only to certain investors. Class R6 shares are closed to most investors. Please see the prospectus for more details. Disinflation continued in most developed economies, with some showing more progress than others. Following the Swiss central bank's rate cuts in the first quarter, two G7 central banks - the Bank of Canada and the European Central Bank - began to cut rates in the second quarter. Additional central banks appear poised to begin rate cuts before the end of the third quarter. As supply and demand factors in Western developed economies come into better alignment over time, we believe inflation will fall further toward central bank targets and economic activity will gradually return to trend growth rates, aided by marginal interest rate cuts by major central banks. We believe the outlook for global infrastructure is positive over the medium term, with healthy economic growth, albeit down from strong levels at the start of 2024. In addition, central banks have initiated interest rate cutting cycles, which should support infrastructure valuations. We see positive tailwinds in specific infrastructure sectors where there appears to be a structural shift in growth prospects due to power demand from AI data center growth, notably electric utilities, which have been spending enormous capital to expand and modernize the grid to accommodate higher energy demand. We expect this secular trend to continue and to benefit various infrastructure sectors with exposure to data center power demand. Top issuers (% of total net assets) The fund is underweight in midstream stocks whose valuations are relatively unattractive to us. Midstream stocks historically benefit from inflation and economic growth tailwinds, both of which have been moderating globally. Though the fund maintains an underweight in the midstream energy sector, Williams Cos. is one of its largest positions and an overweight compared to the benchmark. We believe Williams, a midstream stock, is poised to benefit from its exposure to data center power demand along the Atlantic coast given its Transco pipeline network. The stock has done well this year, and we believe future growth prospects are starting to be reflected in the valuation. The fund's position in National Grid has resulted in an overweight in the gas distribution segment. The company recently completed a large equity offering that has injected years of capital into its balance sheet. Additionally, its capital program has grown in order to accommodate the UK government's energy transmission goals, and it has become in our view one of Europe's most attractive network growth equity stories. The fund is overweight in the telecommunications sector, with Cellnex and Equinix (EQIX) driving the majority of the positioning due to what we consider attractive valuations and above-average growth potential. Cellnex has been exploring strategic divestments of non-core assets, which has in our view the potential to drive significant capital return in the form of deleveraging and buybacks. We don't believe this is reflected in its current valuation. In our view, Equinix is a high quality business that should benefit from the data demand driven by AI adoption. Equinix has completed an internal investigation to contest a recent short-seller report suggesting to us accounting irregularities. The fund also has a large overweight in airports, driven by Grupo Aeropuerto del Sureste. The stock is in our view attractive from a bottom-up perspective based on lack of leverage, high returns on capital and a structural growth tailwind from its exposure to Cancun Airport. We believe the stock remains undervalued given its cash flow growth profile and high potential for greater shareholder returns due to its underleveraged balance sheet and self-funded growth profile. The fund underperformed its benchmark. Relative underperformance was driven by an underweight allocation in the midstream sector and stock selection in the rail sector. An overweight in gas distribution added to relative return. The largest contributors to absolute return for the quarter were Williams Cos. and Southern Co. Southern Co. - The stock's valuation has risen as we believe the company offers an excellent opportunity to capitalize on data center demand within the regulated utilities space. The state of Georgia has taken an aggressive approach in attracting future data center customers, which has apparently driven up expectations for growth and capital spending for Southern Co. Williams Cos. - The stock's return can be partially attributed to rising power demand from AI. With a large majority of US data center demand running along its main gas pipeline, the company's geographical edge provides indirect exposure to these data centers. The company's growth expectations have risen apparently due to natural gas demand for power generation and we remain optimistic about the stock. Two of the largest detractors from absolute return for the quarter were Cellnex and Elia. Cellnex - This European cell tower company detracted from absolute return. Management's free cash flow guidance appeared to disappoint the market and rising lease expenses have been causing management to deploy capital into buying the land where its towers sit. From a long-term standpoint, we believe land ownership is historically good for profit margins because it reduces the company's cost base, but near term, it delays the free cash flow inflection that had been forecasted by the market. Also, given the leveraged nature of the company's capital structure, high interest rates have put downward pressure on valuations. Elia - This European energy transmission grid operator detracted from relative return. Elia has exposure in Belgium and Germany and currently has the highest growth rate of any European utility, driven by an aggressive capital expenditure plan to expand and modernize the grid in both countries. High interest rates hurt its valuation as the company has high external debt and equity financing needs. Still, we don't see growth opportunities changing and we consider the current valuation attractive.