Infrastructure investors brace for era of protectionism

Their first take? A protectionist stance on world trade, particularly from the new US administration, may hurt some of their investments – but Trump’s promises of a major programme of infrastructure investment in the US sound good to them, and some of the personnel on his team are even better.

Kyle Mangini, global head of infrastructure at IFM Investors, said: “The elections, and Brexit for that matter, are signalling the potential for quite substantial change. However, change, at this point, is still quite undefined.”

Infrastructure has grown to become an area of huge interest for private investors the world over in the past few years, particularly among the large private pension funds in the UK, US and Australia.

Pension funds tend to be particularly interested because infrastructure investments are seen as safe, long-term bets, often with government-granted monopolies and inflation-linked revenues.

Some infra investments, however, are more geared to the performance of the economy. A good example is a toll bridge: a government might give you a 30-year concession and guarantee inflation-linked toll increases each year, but you still need traffic. And if the economy takes a big hit, there will be fewer hauliers on the roads.

Infra investors’ fear is that this kind of investment will be hurt by a turn toward protectionism and away from free trade in the west’s developed-market economies, led by a Trump presidency.

Peter Hofbauer, head of infrastructure at Hermes Investment Management, says some infrastructure assets more closely correlated with GDP growth, such as airports, toll roads and ports, could “potentially” be impacted by a slowdown triggered by a disdain for free trade deals. “That’s on the assumption that protectionism slows down GDP growth globally,” he says, stressing that Hermes’ own GDP-linked asset, its stake in Allied British Ports, is less likely to feel any economic pain resulting from such a slowdown.

Mangini at IFM added: “I don’t think that anyone thinks that globalisation is going to end tomorrow, but clearly the momentum is in a direction that’s moving away from free trade rather than moving toward free trade, and that is sub-optimal for the assets that have GDP-linkage.”

Mangini notes that both the Brexit vote and the Trump election were, to an extent, influenced by the dislike of free trade. Other crucial elections, such as the French and German votes in 2017, both will see debates around globalisation, and free markets, largely due to the ruling French Socialist party’s disapproval of the Trans-Pacific trade Partnership and a long-led campaign against it by the German Green Party.

The Trump administration is not all bad news, however. If protectionism – both economically and of borders – was one pillar of the New Yorker’s campaign, the second element was a pledge to kick-start infrastructure projects to the tune of $ 1 trillion, through partnerships with the private sector.

Hofbauer predicts that an emphasis on greater fiscal stimulus, personified in the $ 1 trillion commitment outlined by the incoming US administration, would have “ripple effects” across the globe “and give policy cover for other jurisdictions to follow a similar path of fiscal stimulus”.

This would partially be positive for infrastructure development in the US because, if nothing else, it would bring the need for greater spending in the area to the forefront of legislators’ minds. It would also see a greater number of new infrastructure assets built, either by the public sector, or in conjunction with private money, while privately owned assets would benefit from an increase in inflation, and therefore potential income.

And, despite the protectionist tone now emanating from Washington, at least one member of the new administration has proven a staunch supporter of overseas pensions capital. When the Indiana Toll Road Concession Company was sold to IFM Investors in 2015, the US state’s then-governor, and now vice-president-elect, Mike Pence, was highly complimentary, notes Australian pensions investment expert Stephen Anthony.

Anthony, chief economist of Industry Super Funds, the body representing some of Australia’s largest not-for-profit pension providers, says that much of the necessary detail of the Trump administration’s plan to attract private capital is being eagerly awaited by the industry.

But he added: “The approach that seems to have been applied in some of these Republican state jurisdictions [to date] is encouraging, and people have learned the lesson of how to get these deals done.”

The emphasis on state legislatures is important, according to Ross Israel, head of global infrastructure at Australian fund manager QIC, who argues the approach taken by the Trump administration is not as important as the one pursued by individual state governments. “From an infrastructure perspective, the US is 52 countries,” he insists.

While no one finds themselves able to fully endorse the incoming administration, Israel says the election has not led to a reassessment of QIC’s view of the US. “We’re feeling more glass half full about the US than glass half empty,” he concludes.

The turn toward protectionism, or perhaps nativism, might also bring political risk for overseas investors. In the UK, incoming prime minister Theresa May ordered a review of the Hinkley Point nuclear plant this summer, which was a worry for its investors, the French state electricity company EDF and the Chinese state-backed firm CGN, until she finally gave the go-ahead in September.

Meanwhile in Australia, the government barred two companies, one of which was a Chinese state-owned entity, from purchasing electricity network Ausgrid in August. The network was sold to two local pension-fund investors, IFM and the country’s largest pension provider AustralianSuper, in October, for A$ 4 billion less.

While in both cases, the governments’ hands were shown prior to contracts being signed – unlike the Spanish government’s retroactive cut to solar feed-in tariffs in 2010 – the steps still show administrations more willing to assert their control than in the past.

Despite concerns, neither Israel nor Mangini think this kind of situation should be seen as increasing sovereign risk for infrastructure investors in general. Mangini is keen to highlight the national security issues involved, both in the UK’s Hinkley point project and the privatisation of the largest power network in Australia’s most populous state, New South Wales, which gave each executive pause.

Both were cases involving state-backed buyers, rather than traditional private institutional investors, they pointed out. Pension funds are usually content with a management company running the infrastructure asset on its behalf; but the buyers that have been put under more scrutiny by governments in recent months approach ownership differently.

They would gain access to information through ownership which would be “meaningful” to them, Israel suggests, which gives reasons for the national security concerns cited, at least privately, in Australia and the UK.

— Correction: this story was updated at 10:50 GMT on Wednesday November 22 to correct a typographical error in the rendering of QIC’s name.

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